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This is a major change in tone from Bank of America Merrill Lynch’s economics team, who had previously forecast home prices to fall 3.5 per cent in 2012.The team, which includes Chris Flanagan, Michelle Meyer, and Ryan Asato, is now calling for home prices to rise bottom and actually rise 0.5 per cent this year.
“More information has come our way since the initial forecast, including favourable developments on the policy front, better economic data and a decline in the supply of homes on the market. We have therefore updated our home price model and believe that prices are bottoming now,” wrote the analysts in a note to clients today.
Specifically, they note that the supply of homes and the share of distressed sales have improved significantly.
Here’s their summary of their rationale:
The two most important short-term variables for our model are months’ supply, which is the ratio of inventory to sales, and the share of distressed sales. Both of these are affected by the flow of foreclosures into the market, which has slowed due to policy intervention. Months supply has tumbled lower recently, reaching 6.4 months in February, down from 9.3 months last July. In addition, the share of distressed sales has been modestly lower than expected, averaging 27% in 4Q11. We expect moderate increases in these parameters over the next two years, but due to ongoing foreclosure prevention efforts, we think the levels will be lower than we previously believed.
The analysts are also optimistic on the policy front:
We expect additional policy attempts to prevent foreclosures including Home Affordable Modification Program (HAMP) modifications and some limited debt forgiveness defined in the Attorneys General settlement. In addition, a pilot program to sell 2,500 FNMA REO assets marks the beginning of another arrow in the policymakers’ quiver.