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Gridlocked: The US Housing Market's Forecast Until 2026

Gridlocked: The US Housing Market’s Forecast Until 2026

Former Federal Reserve Bank of St. Louis President and CEO James Bullard has weighed in on a topic that has many Americans on edge: the next rate decision and its impact on the housing market, interwoven with the latest jobs data. Bullard’s insights come at a time when the U.S. housing market continues to grapple with an ongoing affordability crisis, which some experts predict won’t see any meaningful improvement until at least 2026. Among those sounding the alarm are Bank of America economists Michael Gapen and Jeseo Park, who have issued a somber assessment of the current housing landscape.

For the past three years, the U.S. housing market has been in a state of turmoil, largely driven by the pandemic’s economic whiplash. Homebuyers, flush with stimulus cash and seeking more spacious living arrangements, took advantage of ultra-low mortgage rates and migrated to the suburbs in droves. This spike in demand coincided with historically low mortgage rates, creating what some might call a perfect storm for a seller’s market. However, this seemingly advantageous situation has recently flipped into a more precarious scenario, particularly for those looking to buy.

Higher interest rates have since propelled the average rate on 30-year mortgages above 8%, a figure unseen for years. This shift has created what analysts are referring to as a “Golden Handcuff” effect. Many homeowners who managed to lock in record-low mortgage rates of 3% or less during the pandemic are now extremely reluctant to sell. The rationale is simple: why trade a rock-bottom mortgage for one that’s more than double in cost? This reluctance to sell has further constricted the already tight supply of homes, leaving prospective buyers with few viable options.

According to Bank of America strategists, the lock-in effect will likely persist for another six to eight years. This stubborn dynamic is due to the significant gap between current mortgage rates and the ultra-low rates many existing homeowners secured. Gapen and Park noted that unless homeowners are forced to move, most will choose to stay put. They also added that they do not foresee current mortgage rates falling much, even if the Federal Reserve opts to cut rates as anticipated.

As it stands, mortgage buyer Freddie Mac recently reported that the average rate on a 30-year loan had dipped to 6.87% from 6.95%. While this is a slight reprieve from the peak rate of 7.79% seen in the fall, it is still significantly higher than the pandemic-era lows of around 3%. This combination of high mortgage rates and rising home prices has driven affordability to its worst levels in decades. According to Bank of America, the only potential remedy to this affordability crisis might be a recession, a scenario no one is particularly eager to see unfold.

With the housing market seemingly stuck in a quagmire, it appears that potential homebuyers are in for a continued uphill battle. As James Bullard and other experts continue to monitor these developments, one thing is clear: the road to recovery for the U.S. housing market will be anything but smooth. Until then, both buyers and sellers will have to navigate this challenging landscape with caution and strategy.