The housing market is facing a significant challenge that is not expected to improve anytime soon. According to economists at Bank of America, the housing market will continue to struggle until 2026 due to the low supply of homes for sale.
Homeowners who secured low mortgage rates during the pandemic are choosing to stay in their homes, leading to what is known as the “lock-in” effect. This trend is expected to last for 6 to 8 years, impacting housing activity and residential investment that contributes to the GDP.
High interest rates have also played a role in affecting homeownership. Mortgage rates are still around 7%, despite a recent decrease in borrowing costs. This has resulted in limited supply and increased prices for homes that are available for purchase.
In April, home prices reached a new record, although the annual growth rate has slowed slightly. Bank of America predicts that home prices will increase by 4.5% this year, 5.0% next year, and 0.5% in 2026.
Economist Michael Gapen from Bank of America notes that home prices have exceeded their long-term fundamental value based on disposable income. He also believes that the shift in housing demand that drove up prices will diminish over time as the economy continues to recover from the pandemic. Despite this, he does not foresee a significant drop in home prices.