2 Reasons BofA Economists Have Hiked Up Their Forecast For US Home Prices

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Bank of America economists Chris Flanagan and Michelle Meyer have raised their home price forecast to roughly 2 per cent this year, and in 2013.This is up from their previous estimate of 0.5 per cent and 0.3 per cent for this year and the next.

Bank of America first had a noticeable change in sentiment back in March when they forecast that home prices would rise 0.5 per cent in 2012, from a previous call of 3.5 per cent decline in home prices. 

Flanagan and Meyer raised their projections for two key reasons:

  1. Housing inventory has declined more than expected. “Looking ahead, mortgage rate lock-ins associated with refinancing in this historically low rate environment could keep non-distressed inventory contained. This decline in housing supply coupled with a modest pickup in home sales has helped to better align supply with demand. As a result the overall level of inventory in the market has declined, underpinning home prices.”
  2. There has been a shift to short sales (pre-foreclosure sales where a home is sold at a loss) which is a better way of dealing with distressed properties. “Short sales currently sell at roughly a 15% discount to non-distressed prices while REO sales are at roughly a 40% discount. The shift to better price execution through short sales has underpinned overall pricing in the market.”

But Flanagan and Meyer still expect the housing recovery to be bumpy and home prices to soften with declined in the fourth quarter and Q1 2013 on a quarterly basis.

Moreover with housing being a regional story, they expect that these differences will become more visible, as states that have efficiently dealt with foreclosures and that have a healthier economic growth will likely see home prices improve faster.

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