Al’s July 2024 Market Watch

July, 2024

The Housing Market Is “Stuck” Until At Least 2026

At least that is the view of economists at Bank of America. They warned in an interview on CNN that the US
housing market is “stuck” and are convinced it will not be “unstuck” until 2026 or later. The bank argued that home
prices will stay high, and go even higher. Also, the housing shortage will persist, and mortgage rates may not fall
much, even if the Federal Reserve finally delivers on long-delayed interest rate cuts.

Michael Gapen, head of US economics at Bank of America, indicated that the present environment “will take
many years to work itself out.” And that “there isn’t a magic fix. His message for first-time home buyers is one of
patience and frustration.”

Housing affordability is a major problem in America (and locally in the Somerset County area as well). Home
prices rose significantly during the 2020 to 2022 time period with the decrease in the Fed Fund rate and mortgage
rates. Then the Fed added to the problem when its fight with inflation sent mortgage rates surging to near, and
sometimes over, the 7 percent mark. This “one-two punch has made it a historically unaffordable time to buy a
home” according to Gapen.

“Its been a weird combination. Mortgage rates rose substantially but so did home prices. That typically does not
happen,” said Gapen. And supply is the leading factor in this. Market Watch readers know that the supply of homes
is a problem in this area. At the end of June, there was only a 1.52 month’s supply of homes in Bridgewater. That is
down from 1.96 month’s supply in May. A balanced market would call for between a 5 to 6 month’s supply. This
indicates that the supply of homes simply cannot keep up with demand. With eager buyers snapping up homes
quickly creating fierce competition, prices have had nowhere to go but up. Bank of America expects home prices
will climb nationally by 4.5 percent this year and then by another 5 percent in 2025, before perhaps dipping slightly
by .5 percent in 2026.

Lock-In Effect” Could Persist For Eight Years

One major problem, according to Gapen, hurting supply is the “lock-in effect.” Readers of Market Watch are familiar with this problem. A large majority of homeowners are effectively locked into their property after refinancing or getting a mortgage during the pandemic years when ultra-low rates were available. Research shows that as of the
beginning of 2024, 78.7 percent of mortgage holders had rates of 5 percent or less. And 59.4 percent had rates
under 4 percent. Buying now at current rates would require them to pay hundreds of dollars more per month on
interest alone. In addition, home prices have gone up since then.

The result is for many, it just doesn’t make sense to move. And because those homeowners are not moving, the
supply of existing homes on the market is limited. “Why would I sell unless I have to?” said Gapen. “Prices have
gone up and the mortgage rate is a lot higher. So, I’m content to stay where I am.”

Bank of America warns the lock-in effect could persist for another six to eight years, keeping a lid on supply during that time. That is because the mortgage rate of people who already own a home is historically low. And the rate
for new buyers is elevated. Bank of America doesn’t think that gap will shrink much for years to come.

What the lock-in effect means is that potential buyers who want to size-up to a larger home can’t, and the next
generation can’t even get their foot in the door for a starter property. Right now the move-up market does not exist,
according to the interview. Starter homes have doubled in value, and their owners would like to move up to a larger
residence. But the problem is they can’t take their mortgage rate with them. So, the housing market is stuck, for
now at least.

In theory, a flood of supply of new homes would help unstick the market. That could be new construction, However, Bank of America expects new housing starts, which is a measure of newly constructed homes, to remain flat for
the coming years. And for areas like Bridgewater and some surrounding areas, there is little land that is not developed for new construction of homes. For these towns, they are more dependent on the resale market.

Divide Between Have And Have-Nots

According to the interview, the forecast for a “stuck” market cuts both ways. The spike in home prices has padded the net worth of existing homeowners, and given them additional financial flexibility and security. But there are
many who are on the outside looking in. They’d like to buy but can’t afford to at these prices and mortgage rates.
The longer they are prevented from buying, the more time they miss out on wealth creation.

In a recent Gallup poll, just 21 percent of Americans said it is a good time to buy a house, tied for the worst reading in Gallup history. An overwhelming majority, 76 percent, said it is a bad time to buy.

Gapen, the Bank of America economist, said if the US economy achieves the soft landing that he expects, meaning that inflation cools without triggering a recession, there is a risk that home prices will rise even more than anticipated. That would be because the Fed would lower rates, which in turn lowers mortgage rate, which in turn allows
more buyers to enter the market and compete for homes, which drives up prices.

On the other hand, according to Gapen, if the durability of the recovery has been overestimated, and a recession
is on the way, home prices could tumble and affordability would ease. “But, obviously, you don’t want to go through
a recession to have better housing affordability,” he said.

Recognized For Being In The Top Ten For May 2024

I have the good fortune to say 2024 has been a good year. For May, 2024, I have been recognized as one of the
Top 10 agents in the Bedminster/Bridgewater Coldwell Banker office (actually number 4). And that is out of the 130-
plus agents associated with that sales office. I would like to thank my clients, both on the buy and sell side, who
trusted me to assist them in perhaps their most significant and life changing decision. It has been a pleasure working with you all, and I wish everyone the best in the future