“The U.S. housing market is stuck, and we are not convinced it will become unstuck anytime soon,” Bank of America economists Michael Gapen and Jeseo Park wrote in the Monday note. What is causing the real estate market to be stuck? Is being stuck actually the best outcome for real estate? What does this mean for interest rates and real estate appreciation. What happens in 2026 according to their predictions?
What is Bank of America predicting for real estate appreciation?
They expect home prices to rise , 5% in 2025 and 0.5% in 2026, before the pandemic’s effects on the market finally fade. Until then, the forces that have “reduced affordability, created a lock-in effect for homeowners and limited housing activity” will remain in place.
What is Bank of America predicting for interest rates?
Mortgage buyer Freddie Mac said Thursday that the average rate on a 30-year loan this week fell to 6.87% from 6.95%. While that is down from a peak of 7.79% , it remains sharply higher than the pandemic-era lows of just 3%.
High mortgage rates, combined with rising home prices, have caused affordability to plunge to the worst level in nearly decades, according to Bank of America.
What are the golden handcuffs in real estate?
The Bank of America strategists expect the lock-in effect will take at least six to eight years before it goes away, due to the significant gap between current mortgage rates and the rates that many homeowners already have.
“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.”
How long will the Golden handcuffs last?
Depending on the economy if we have a very shallow recession and rates peak soon and then fall back shortly, the golden handcuffs scenario will likely hold up as property owners wait out the market. We are currently seeing a similar scenario play out as property owners basically wait out the market.
Eventually the market will loosen and one of the key drivers could be a more substantial reset in the economy due to the higher for longer rates. As rates stay higher for longer, the probability of something breaking is increased exponentially. Here are three other factors
- Life Happens: Divorce, Marriage, kids, deaths, etc… In the short term if there is an economic hiccup most will hold on for a little while, but you can’t plan life around the economy and eventually life happens. From Marriage, Divorce, job changes, kids, empty nesters, deaths, etc… all these events will ultimately cause a sale or purchase of real estate which will cause real estate to turn. How extensive these events are will depend on how long the recession lasts and how high rates remain.
- Unemployment rate will increase: It is not possible to get inflation under control without addressing the wage pressures in the labor market. We are already seeing many high tech companies cut headcount from Google, Microsoft, Amazon, etc… As rates rise, the unemployment rate will also rise which will force people to give up the golden handcuffs. Although we have yet to see this occur in the labor market data, I can say with 100% certainty it will happen, it is just a matter of time.
- Migration back/out: As the unemployment rate rises, the bargaining power of employees will decline. You will see more companies requiring workers back in the office more days and/or adjusting pay to compensate for the location. This trend will be supercharged in a recession.
Why is bank of America predicting 2026 as a tipping point for real estate?
Reading their report, I’m uncertain as to why 2026 is the impetus for a reset, but it does seem like a plausible date. A number of events will occur over the next twelve months including higher for longer rates and possibly a reset in the economy.
Furthermore based on their predictions of the golden handcuffs lasting 6-8 years, 2026 is the midpoint at 7 which seems like a reasonable assumption. Note, based on the current data, this tipping point could actually occur later this year if inventory keeps building.
Summary
Although the market is “stuck” for another year according to the Bank of America analysis, they are not predicting an impactful correction. Bank of America assumes that real estate will grow between 4 and 5% this year (Are home prices really rising or did they fall already?) with a reset coming in 2026 due to the “golden handcuffs” loosening for homeowners.
It is important to note that BofA’s predictions assume a perfect soft landing for the economy and further that there is nothing big in the economy that breaks (like commercial real estate, regional banking, consumer defaults, etc…).
I’m hopeful that these predictions are accurate, but I’m also pragmatic that these predictions are extremely optimistic and downside risks far outweigh any upside. I wouldn’t put too much stock in the bank predicting another year of growth as the downside risks are already emerging and likely will radically alter these predictions.
Additional Reading/Resources:
https://www.foxbusiness.com/economy/us-housing-market-stuck-might-remain-way-until-2026
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Glen Weinberg personally writes these weekly real estate blogs based on his real estate experience as a lender and property owner. I’m not an armchair reporter/writer. We are an actual private lender, lending our own money. We service our own loans and own commercial and residential real estate throughout the country.
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Written by Glen Weinberg, COO/ VP Fairview Commercial Lending. Glen has been published as an expert in hard money lending, real estate valuation, financing, and various other real estate topics in Bloomberg, Businessweek ,the Colorado Real Estate Journal, National Association of Realtors Magazine, The Real Deal real estate news, the CO Biz Magazine, The Denver Post, The Scotsman mortgage broker guide, Mortgage Professional America and various other national publications.
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