Bank of America predicts 6-8 year ‘lock-in effect’ for housing market

Record home prices could be stuck until the 2030s due to a mortgage rate "lock-in" effect, Bank of America (BofA) wrote in a recent note.

Although BofA acknowledged that the worst of home-price appreciation has passed, its analysts don't think affordability will improve anytime soon.

The culprit is still high mortgage rates, which don't allow many buyers to qualify for a loan and, perhaps as importantly, deter existing homeowners from selling.

According to a Creditnews Research report, nearly two-thirds of existing U.S. mortgages were locked in when rates were below 4%—nearly half the current rate.

For many homeowners, selling now means trading in their ultra-low mortgage rate for a much higher one—a trade-off many aren’t willing to make.

As such, BofA predicts housing prices will remain high as long as there is a sizable gap between the current rate and the effective rate of all outstanding mortgages.

“The wide gap between current mortgage rates and effective mortgage rates means most homeowners are unwilling to move unless forced. We think it could take 6 to 8 years for the lock-in effect (dearth of transactions in existing homes) to go away," BofA analysts wrote.

A 1970s-era housing recession

2023 was the worst year for home sales in nearly three decades, and recent data point to a continued slump.

According to Lance Lambert, co-founder of housing data analytics provider ResiClub, in April, existing home sales reached their lowest level since the 1970s.

By Lambert's estimates, there were 4.14 million existing home sales in April—a hair off the 2008-2008 slump. That’s also not much higher than in April 1978, when sales were at 4.09 million.

That’s a huge problem, as existing homes account for more than 88% of the residential real estate market.

The big difference between now and then is that the U.S. population has grown by nearly 120 million people.

The reason for the dismal sales pace is that “housing affordability has deteriorated so much that many buyers and sellers alike have pulled back from the market,” Lambert wrote in a ResiClub newsletter.

Based on Goldman Sachs’ research, the pace of existing home sales is expected to remain below 4.5 million units until 2027.

By comparison, 6.1 million existing homes changed hands in 2021, and the average was between 5.3 million and 5.6 million before the pandemic.

Meanwhile, experts have cautioned against expecting any meaningful decline in mortgage rates.

According to the Mortgage Bankers Association, Realtor.com, the National Association of Realtors, and Wells Fargo, 30-year rates will average between 6.5% and 7% in 2024 before dipping slightly next year.