For people thinking of selling their house, it might pay to wait a few more years.
Housing prices around the country have been rising at a dizzying pace since the pandemic, increasing 6% on average in just the last year. With these rapid increases, homeowners can command a pretty penny in today's red-hot housing market.
But according to Bank of America, there's still room for prices to go higher.
In a recent note, Chief US Economist Michael Gapen and his team revealed that they expect home prices to rise by 4.5% this year and 5% in 2025. Gapen doesn't foresee the market cooling down until 2026 at the earliest. With this in mind, current homeowners can sell for even higher prices down the road.
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Patience is a virtue
There are a couple of reasons homeowners should wait to sell.
First, Gapen believes pandemic effects are still working their way through the economy and won't fully dissipate until the end of 2025.
In addition to widespread inflation, the pandemic also spurred longer-lasting housing trends. Increased work from home and migration to suburbs led to a spike in housing demand, especially outside metropolitan areas. Gapen sees these trends as permanent changes that will continue to drive demand for housing and push prices up.
Mortgage rates are another consideration that prospective home sellers should keep in mind. Many homeowners took advantage of the low rates during the pandemic and refinanced their mortgages for as low as 3%. With current mortgage rates hovering around 7%, it's more favorable for existing homeowners to wait and continue taking advantage of a lower effective mortgage rate.
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Although the Fed is expected to cut rates later this year, Bank of America doesn't foresee mortgage rates falling much in the near future. In fact, the bank predicts that it could take anywhere between six to eight years for the gap between the effective and fixed mortgage rates to close. This creates an environment where it's more beneficial for existing homeowners to stay put.
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Prices could increase beyond 2026
In this market, homeowners can take advantage of at least two more years of price appreciation. If pandemic effects do fade by the end of 2025, Gapen predicts that the housing market could cool to a rate of 0.5% growth by 2026. By then, less restrictive monetary policy, greater inventory of homes, and a stronger macroeconomic environment should open up the housing market and normalize home prices.
However, there's a chance that prices could continue to expand well past 2026, too.
In the long run, home prices are closely correlated to growth in real personal disposable income. But according to the bank, "home prices tend to have strong inertia," meaning that prices can continue to rise above fundamentals for prolonged periods of time before finally recalibrating.
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As seen in the graph below, home prices have historically followed disposable income trends but go through periods of over or undershooting.
For homeowners, this inertia means that there's even more opportunity for price appreciation.
According to Gapen, in a scenario where pandemic effects fade slower than expected and the housing market exhibits high inertia, home prices could rise up to 5% in 2026.
Additionally, demographic shifts in upcoming years will provide a secular boost to housing demand as millennials reach homebuying age. Millennials now outnumber baby boomers and have overtaken them as the biggest group of homebuyers, according to the National Association of Realtors.
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Given these circ*mstances, homeowners should be in no rush to sell.
