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A disappointing spring homebuying season has some housing industry forecasters dialing back their expectations for 2024 home sales even as they remain convinced that a rebound is in sight next year.
That’s not the case at Bank of America Global Research, where analysts believe home sales won’t bounce back until 2026 if home prices continue to rise and the “lock-in effect” felt by homeowners who refinanced at low rates during the pandemic takes six to eight years to dissipate.
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Pandemic-fueled forces “that have reduced affordability, created a lock-in effect for homeowners, and limited housing activity will remain in place through our forecast horizon,” Bank of America Global Research economists Michael Gapen and Jeseo Park said in their June 24 U.S. Economic Viewpoint. “The U.S. housing market is stuck, and we are not convinced it will become unstuck anytime soon.”
Home sales forecasts reflect uncertainty
Source: Fannie Mae Housing Forecast, June 2024; MBA Mortgage Finance Forecast, June 2024; NAR Economic Update, May 2024; Bank of America Global Research U.S. Economic Viewpoint, June 2024.
Bank of America analysts predict that elevated home prices and mortgage rates, coupled with a lack of inventory, will limit 2024 sales of existing homes to 4.1 million.
Not only is that more pessimistic than recent projections by housing industry economists employed by the National Association of Realtors (NAR), Mortgage Bankers Association (MBA) and Fannie Mae, but BofA is forecasting that sales of existing homes will fall again next year, to 4 million.
Last year was the worst year for existing home sales since 1995, NAR Chief Economist Lawrence Yun noted in briefing the trade group’s leadership in Washington, D.C., last month. In December, NAR was forecasting that sales of existing homes would grow by 13.5 percent in 2024, to 4.71 million.
But after mortgage rates rebounded and crimped spring home sales, last month NAR trimmed its forecast for 2024 existing sales to 4.5 million. NAR still expects sales of existing homes to hit 5 million next year — with “further gains in 8 out of the next 10 years.”
Lawrence Yun
“The market is at an interesting point with rising inventory and lower demand,” Yun said Thursday in a statement announcing a 2.1 percent dip in May pending home sales. “Supply and demand movements suggest easing home price appreciation in upcoming months. Inevitably, more inventory in a job-creating economy will lead to greater homebuying, especially when mortgage rates descend.”
Fannie Mae’s highly regarded Economic & Strategic Research (ESR) Group has also slashed its projections for 2024 existing home sales to 4.15 million. But Fannie Mae economists expect sales of existing homes to rebound by 9 percent next year, to 4.51 million, as more listings come onto the market and mortgage rates drop.
Doug Duncan
A ramp-up in home sales “will require some combination of continued household income growth, a further slowing of home price appreciation, or a decline in mortgage rates to bring affordability within range of many waiting first-time and move-up homebuyers,” Fannie Mae Chief Economist Doug Duncan said, in a statement.
Mortgage rates expected to keep falling
Source: Fannie Mae Housing Forecast, June 2024; MBA Mortgage Finance Forecast, June 2024.
MBA economists expect rates on 30-year fixed-rate mortgages to steadily decline to an average of 6.0 percent during Q4 2025 and are in sync with Fannie Mae economists in predicting that home sales will rebound to 4.49 million next year.
The thinking behind Bank of America’s perspective
Bank of America analysts have a different perspective that’s caught the attention of media outlets like CNN.
Michael Gapen
Before becoming Bank of America’s chief U.S. economist, Gapen held the same title with Barclays Investment Bank, and he also lists experience with the Federal Reserve Board and International Monetary Fund on LinkedIn.
Jeseo Park
Park, a Bank of America U.S. economist focused on macroeconomic issues affecting housing, is a recent University of California, Berkeley grad.
Affordability has plunged to the lowest level in five decades, going back to the early 1980s when the Federal Reserve raised short-term interest rates to nearly 20 percent to cool the economy, the BofA economists said in their latest U.S. Economic Viewpoint.
In the past, rising mortgage rates have put the brakes on home price appreciation. But Gapen and Park expect home prices will continue to rise — by 4.5 percent this year and 5 percent in 2025 — before appreciation cools to 0.5 percent in 2026.
The pandemic, they said, “ignited a one-time shift in relative demand for housing in lower density areas that has taken several years to pass through to home prices,” and is unlikely to be reversed.
While speculation that fueled the housing boom preceding the 2007-09 recession “eventually contributed to its demise, we do not see that happening this time around,” BofA analysts said. “Home price appreciation today is driven mainly by demand fundamentals, not speculative excess.”
And because many homeowners took the opportunity to refinance their mortgages when rates dipped to record lows during the pandemic, the average mortgage rate paid by U.S. households is at an all-time low in records dating to 1977, they noted.
“The wide gap between current mortgage rates and effective mortgage rates means most homeowners are unwilling to move unless forced,” Gapen and Park wrote. “Moreover we do not expect current mortgage rates to fall much even if the Fed cuts as we anticipate.”
While the scarcity of existing homes should incentivize homebuilders to crank out more new homes, the BofA analysts noted that new home inventories are already near all-time highs, and builders may be concerned about getting overextended.
That’s one reason BofA forecasts housing starts will remain flat through 2026, and that new home sales will average 650,000 per year in 2024, 2025 and 2026 as growth decelerates and labor markets cool.
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