The housing market is facing a significant challenge that is expected to persist until 2026, according to economists at Bank of America. The supply of homes for sale is at record lows, with the “lock-in” effect from ultra-cheap mortgages obtained during the pandemic causing homeowners to stay put. This long-lasting impact is projected to keep housing activity subdued for 6 to 8 years, ultimately affecting residential investment and GDP calculations.
High interest rates have further exacerbated the situation, with mortgage rates hovering around 7% despite recent fluctuations in borrowing costs. This has kept supply low and driven prices higher for homes that are available on the market. In April, home prices hit a new record, but annual growth slowed slightly. Bank of America anticipates home prices to continue growing moderately over the next few years, with a projected increase of 4.5% this year, 5.0% next year, and 0.5% in 2026.
Economist Michael Gapen from Bank of America noted that home prices have already surpassed their long-term fundamental value based on disposable income. As the economy continues to normalize post-pandemic, the structural shift in housing demand that drove up prices is expected to diminish over time. While a significant drop in home prices is unlikely, the housing market is poised for a prolonged period of stagnation due to supply constraints and the “lock-in” effect.