Bank of America Merrill Lynch just cranked up its home price forecast to 11.8%in 2013, from a previous estimate of 8%.
This comes after yesterday’s Case Shiller index climbed 12.1% in April and Q1 home prices were up an annualized 16.7%.
Chris Flanagan at Bank of America explains that home prices are being revised up for three key reasons — better inventory dynamics, share of distressed sales, and home price momentum.
“All three have been favourable for home prices this year. The share of distressed properties continues to fall, reaching 19.5% in April which is the lowest level since August 2008.
“Inventory dynamics are also very favourable. Inventory collapsed through last year with months’ supply of existing properties reaching a low of 4.3 months in January. Sellers have started to respond to favourable housing conditions with an increase in inventory starting in February (on a seasonally adjusted basis). Months supply has edged up to a still-low 5.1 months as of April. We forecast a continued modest rise to 5.5 months by the end of the year. With rising home prices, sellers will continue to enter the market. Overall, this is a positive development as it will lead to greater turnover of the housing stock.
“The increase in momentum may be the most powerful driver of home prices. As we learned the hard way from the past cycle, expectations about the housing market are an important input into future home prices. Home prices have now been rising consistently since February 2012 and have accelerated notably at the turn of the year. As the Fannie Mae housing survey shows, 55% of respondents now expect home prices to increase over the next 12 months, compared to only 35% this time last year. The University of Michigan survey shows a similar dynamic with 12% of respondents reporting it is a good time to buy because of rising home prices, back to levels last seen in mid-2005.”
Flanagan does however expect the pace of home price growth to slow in the second half of the year. Paul Diggle at Capital Economics shares a similar view.
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