The housing market’s lock-in effect could last into the next decade as mortgage rates stay high even with Fed cuts, BofA says

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The lock-in effect that has kept U.S. housing market activity subdued probably isn’t going away this year or next year or even the year after that.

It could hang over prospective buyers and sellers of existing homes for six to eight years before finally going away, Bank of America warned in a note on Monday, locking down the market into the next decade.

“The wide gap between current mortgage rates and effective mortgage rates means most homeowners are unwilling to move unless forced,” analysts said. “Moreover we do not expect current mortgage rates to fall much even if the Fed cuts as we anticipate.”

When borrowing costs were lower during the depths of the pandemic as the Federal Reserve slashed rates to near zero, homeowners rushed to refinance, leaving U.S. households with the lowest effective mortgage rate ever on records going back to 1977, according to BofA. It has ticked up about half a percentage point from its trough, but the effective rate was still at a low 3.8% in the first quarter.

As the Fed began hiking rates in 2022 to fight inflation, current mortgage rates went higher as well. Now there’s a big gap in rates.

Earlier this month, a report said more than half of outstanding mortgages have an effective rate of 4% or lower, and more than three-quarters have a rate of 5% or lower. Meanwhile, the current 30-year fixed rate is still hovering around 7%.

With homeowners unwilling to give up their low effective rates, the supply of existing homes has been tight and this year’s spring selling season has been muted.

Sales of existing homes hit a seasonally adjusted annual rate of 4.14 million in April of this year, barely budging in almost 18 months, BofA noted. 

The bank sees that pace staying relatively flat in the coming years, projecting sales of 4.1 million for all of 2024, 4 million in 2025, and 4.2 million in 2026.

“The US housing market is stuck, and we are not convinced it will become unstuck anytime soon,” analysts wrote. “After a surge in housing activity during the pandemic, it has since retreated and stabilized.”

With supply still constrained and demand still elevated from the pandemic-induced shock, BofA expects home prices to jump 4.5% in 2024 and 5% in 2025, before finally cooling off with a 0.5% uptick in 2026. But prices could surge another 5% in 2026 if pandemic-related factors persist, analysts warned.

And don’t expect much help from newly constructed homes. The bank sees housing starts averaging a stable 1.4 million units in 2024, 2025, and 2026, with sales of new homes averaging 650,000 those years.

But others in the real estate sector think even a modest decline in mortgage rates could unlock a burst of housing market activity.

Earlier this month, Compass cofounder and CEO Robert Reffkin told CNBC that he would “feel good” about a 6.5% rate, “but the magic number is 5.9999.”

“That’d be marketing magic, and would tell the world that mortgage rates are at a level where they should go and grab a property,” he said.

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