Bank of America: Home prices will rise over the next two years

Bank of America: Home prices will rise over the next two years

According to Bank of America, why will America's housing affordability crisis last until at least 2026?

Millions of homes could flood the U.S. housing market thanks to the baby boomer generation.

U.S. home prices rose 46% from January 2020 to 2024 due to pandemic-era migration trends.

Bank of America said rates will rise over the next two years.

The impact of the mortgage lock-in will last for six to eight years.

Bank of America said the pandemic-era housing boom has remained strong and should maintain price momentum through at least 2026.

The bank wrote on Monday that the U.S. housing market will rise 4.5% and 5% this year and next. While it expects values ​​to rise just 0.5% in 2026, continuing the pandemic factors that pushed the market higher could also mean a 5% jump instead.

"Once housing prices reach their new high, their impact on housing price appreciation should fade. This does not mean housing prices will decline. Instead, one important source of housing price appreciation should be behind us," the analysts wrote.

According to the Case-Shiller index, prices rose by 46% between January 2020 and 2024.

According to a March Redfin report, first-time homebuyers must now earn twice what they did four years ago to buy a home. The bank noted that a recession would be required to increase affordability.

But as pandemic distortions normalize, these effects will likely disappear completely by 2025, Bank of America said. After that, any interest rate rise will be supported by housing fundamentals, albeit at a more moderate pace.

However, buyers should expect a moderate improvement in affordability, especially since separate headwinds will continue to keep costs high.

While home prices have risen during the pandemic, so have mortgage interest rates, jumping beyond the rates most households hold on their existing properties. This has prevented many owners from selling their homes and suppressed sales during 2022 and 2023.

The analysts wrote that this "lock-in effect" will not go away, and they expect mortgage interest rates to remain high, even if interest rates fall as expected.

"We believe it may take 6 to 8 years for the lock-in effect (lack of transactions on existing homes) to disappear. The wide gap between current and effective mortgage rates means that most homeowners are unwilling to move unless they have to." They said.