3 Reasons Why Bank Of America Just Cranked Up Its Outlook For Home Prices

Business Insider

Bank of America economists Chris Flanagan and Michelle Meyer have revised their home price forecasts for 2012 and 2013.

They now expect home prices to rise 6.4 percent in 2012, from a previous estimate of 5 percent; and 4.7 percent in 2013, from a previous call for 3 percent growth.

Three main factors are behind their upward revision: greater momentum, continued decline in inventory, and greater credit availability.

Momentum

Previous projections drew on expectations that prices would decline as distressed sales increased and the economy weakened. This turned out not to be true.

"Momentum is very important for predicting home prices. Expectations for future prices are a function of current prices. The faster home prices turn, the more people believe they will continue to gain. This is particularly true at this early stage in the cycle, when potential homebuyers are trying to time the bottom in the market. Survey measures suggest confidence in the housing market has improved, albeit from low levels."

Depleted inventory

Inventories have continued to fall, and Flanagan and Meyer say that at the current sales pace, it will only take 4.8 months to return the stock of homes on the market to a normal pace. The few sources of inventory have been construction, distressed properties, and housing turnover (ratio of existing home sales to existing stock).

In terms of construction they see no proof that "builders have been too aggressive". Distressed properties also continue to clear up, though slowly. In coming years however investors who bought distressed properties for bank-owned-to-rental purposes are expected to add to inventory.

Credit availability

Recent mortgage policy and servicing announcements could boost credit and add momentum for home prices. Developments like qualified mortgage (QM) by the Consumer Finance Protection Bureau that can help lenders avoid litigation for instance should encourage them to make more loans.

Under the rule, borrowers with monthly debt payments that exceed 43 percent of their income won't be considered for a qualified mortgage. In the case of prime quality borrowers if lenders don't engage in risky loan behavior like interest only loans, negative amortization etc they can avoid any litigation from borrowers.

They also argue that the recent settlement of 10 mortgage servicers with regulators (which has been criticized by many) should help servicers direct more of their resources to creating a "broader framework allowing eligible borrowers to receive compensation significantly more quickly."

SEE ALSO: The 10 American Housing Markets That Made Tremendous Turnarounds In 2012 >



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