Housing to Remain Locked in Deep Freeze

Bank of America stated that the housing market will remain locked in its mini ice age until, at least, 2026; and that’s the good news! Seriously. According to BofA, even when the ice dam in housing sales starts to break up, it could take eight years to completely clear out the obstacles to where the housing market can normalize. The bank also said home prices may rise even higher than they are now due to even tighter inventory. That is in spite of frozen sales, which fell again in May to a record low, according to data released. What little is available to sell may sell for more, even if there are few buyers.

Housing will freeze harder for a number of reasons

It’s already the oddest housing market I’ve ever seen, but the bank’s reasons for it to get worse seem to make sense. First, nothing will get better until the Fed starts lowering interest rates because high interest costs are the big reason no one wants to list their home for sale. People who want to sell and get a different home are trapped by knowing they could never afford a new mortgage on the home they have now, much less on an upgrade or just a matching home in a different locale that could be tens of thousands of dollars higher in price by the time they find one they like. The flip side is that high interest rates are also the reason few people want to buy.

We don’t know when the Fed will lower rates, but we do know the date keeps moving further off in terms of how the Fed presents its likely plans and certainly much further off in terms of how stock and bond markets have been interpreting the Fed. We’re now likely at a first rate cut in 2025 unless the economy blows apart in 2024. At best for wannabe home sellers who will become wannabe home buyers, the first cut would be the end of this year.

The math from there becomes more clear. When the Fed does start lowering its target rate, it may take a little time for that to work its way through financial markets. More importantly, the Fed typically lowers in steps, and we have to go many steps down before we get to a level at today’s prices that will make sense because the final mortgage rates will still almost certainly be well above what people paid who bought since the Covidcrash or really anytime in the past decade on prices that are well what they paid in the past.

It will not only be awhile for rates to get back down, but sellers will keep waiting to see those rates so they know they can buy a replacement home, so inventory is likely to remain shy even as rates come down. The bank reasonably (in my opinion) believes it will take many years for this logjam to loosen up until everything flows freely again.

That is intensely frustrating to hear for those who have been wanting to buy a home; so, I wish I could share better hope than that, but I think the bank likely has it right … at least, for many areas. It’s hard to hear news coming in worse all the time if you’ve been wanting to buy, especially when a recent Gallop poll tied it’s worst reading in Gallop history for how many Americans think this is a terrible time to buy a house. (76%) Sadly, about the only hope is a recession to peel prices back down.

BofA says that, if the Fed scores a soft landing, prices could rise even more as the economy heats back up. At least, I can give you some screwball kind of hope there: the odds of a bad recession are much better than the odds of a soft landing due in the near term to those broken flight gauges we’ve been talking about, causing the Fed to tighten while we are already in a recession; but due more in the longer term to the dismantling of the Everything Bubble that the Fed inflated with all of its hot-air money for years finally deflating when recession does come. If the Fed chooses to blow that back up again to get us out of recession, it does so only at the cost of reigniting inflation into a fury.

Housing took a one-two punch. First, prices that were already higher than the 2007 peak spiked during Covid19. Then, because the Fed and feds created massive inflation during Covid19, the Fed started hiking rates to kill its inflation. Even if inflation ends today, the Fed will have to watch several months to be sure it is down before it starts cutting rates. It has said so many times. In the meantime, we read that the number of new homes being started has fallen way off and the number of permits being applied for has fallen way off. That will almost certainly continue to be the case until the Fed does start lowering rates, so we have many more months of sharply curbed construction, compounding the already bad inventory problem. (Some locations are likely not as tight as others, of course.)

Nationally, the median price of home is up 6% from a year ago. BofA expects prices to climb 4.5% this year during the growing inventory shortage and then another 5% next year. When things do loosen up, it may take time for contractors, having been stung, to move back into the market, and then it will take time for them to complete builds.

Most-livable cities become less livable

While it is just a statistical effect (an effect on ranking), the costs that were just mentioned, which have been rising a lot more than CPI says (due to that lag effect I’ve written about), have pulled a number of cities down in their ranking as the most livable cities—at least in Canada and Australia, which just got hit with blistering surprise inflation reports right when they thought they had inflation largely taken care of. (Likely to happen here soon, too.)

Melbourne, Sidney and Vancouver have all fallen due to sharply increasing unaffordability, and they were already unaffordable and due to scarce inventory of rentals. It’s not that we care how they rank, but it just shows that already terribly expensive cities are getting worse.

Disruptive protests are also bringing a number of cities down. No surprise, as a rise in civil unrest was one of my Deeper Dive predictions for The Year of Chaos, 2024.

Conclusion

So, here we are, right back to where we were when sales plummeted during the big Covid panic lockdowns.

Not everyone agrees with BofA and with my agreement with BofA (a bank I loathe from personal experience, so agreeing with it runs against my natural bias):

“The market is at an interesting point with rising inventory and lower demand,” NAR Chief Economist Lawrence Yun said in a statement.

“Supply and demand movements suggest easing home price appreciation in upcoming months. Inevitably, more inventory in a job-creating economy will lead to greater home buying, especially when mortgage rates descend.”

I’m inclined to say, “Good luck with that.” He’s the chief economist of the biggest bunch of real-estate sales people in the US, so I think he’s talking his book. Not too surprising to hear people in the industry talking about how promising it looks. They did that in 2007, too.