real estate
Mortgage rates are unlikely to drop below 6% until 2026. Curtis Adams/

Bank of America (BofA) analysts recently noted that the prolonged US housing affordability crisis won't improve until at least 2026 due to rising property prices and short supply as homeowners stay locked in due to elevated mortgage rates.

While the US housing market appeared to stabilise after years of muted activity due to the pandemic, the latest data from the US Census Bureau indicate the housing market could be a drag to the economy in the foreseeable future.

Housing data for May show that sales of new single-family rentals dropped 11.3% quarter-over-quarter (QoQ) to 619,000 from 698,000. Meanwhile, the construction of new residential homes fell by 5.5% to 1.27 million, marking a record low since 2020. The median sales price of new houses sold in May also rose to a new record of $417,400.

"The US housing market is stuck, and we are not convinced it will become unstuck anytime soon," BofA economists Michael Gapen and Jeseo Park recently wrote in a note. They see home prices rising by 4.5% this year, 5% in 2025, and 0.5% in 2026 before the effects of the pandemic fade.

The analysts added that the forces that have "reduced affordability created a lock-in effect for homeowners and limited housing activity" will stay in place.

The drop in new construction also poses another headwind for the economy as consumer spending continues to cool down.

Why Are Homeowners Reluctant To Sell?

Home prices surged during the pandemic as homebuyers, equipped with stimulus cash, capitalised on extremely low mortgage rates of 3%. The homebuying frenzy stopped when the US Federal Reserve aggressively hiked interest rates to crush inflation.

The monetary tightening campaign by the Fed pushed the average 30-year mortgage as high as 8%. Although 30-year mortgage rates fell slightly this month to hover in the mid-6% range, the Mortgage Bankers Association predicted that rates won't drop below 6% until 2026.

BofA strategists believe the gap between current and pre-pandemic mortgage rates has created a lock-in effect that will take six to eight years before the effects fade. Homeowners who locked in at low rates before the Fed's rate hike campaign have been unwilling to sell their homes because of elevated mortgage rates, thus creating a supply shortage.

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

Note that inventory improved marginally in May to 481,000 houses, representing a 9.3-month supply. According to National Association of Realtors chief economic Lawrence Yun, some homeowners are parting with their homes due to life events like marriages and family planning.

Renters May Be Suffering More Than Homeowners

A recent Harvard University's Joint Center for Housing Studies report revealed that homeowners and renters continue to battle surging housing costs.

The report highlighted that almost one in four households that own a home "are now stretched worryingly thin," while the liabilities are even worse for renters.

"For renters, the landscape is even more challenging," the report said. "While rents have been rising faster than incomes for decades, the pandemic-era rent surge produced an unprecedented affordability crisis."

Moreover, total renters putting over 50% of their income into housing bills and utilities jumped in 2022 to a record 12.1 million. Naturally, a high proportion of income going to rent increases the risk of renters becoming unhoused if they face unexpected financial situations.

The Harvard report said that "state and local experimentation with regulatory reforms and incentives will incrementally add affordable homes" and that there's a "need for down payment support and access to low-interest mortgage products to close racial gaps and put homeownership within reach for households with modest incomes."