In a new report titled “Someone say House Party?”, BAML’s Chris Flanagan, Michelle Meyer, and Justin Borst write that “a positive feedback loop has begun”. Basically, when people think home prices are rising, they think they will keep doing so and credit conditions will improve, and this in increases demand for homes.
And there’s proof of this. Fannie Mae‘s latest survey shows that 48 percent of respondents believe that home prices will rise over the next 12 months, only 10 percent forecast a fall.
“It is a powerful positive relationship especially in this environment of historically low interest rates and a Federal Reserve determined to keep policy accommodative.”
Tight housing supply and affordability are likely to stoke demand and push home prices higher.
What’s more, the declining inventory isn’t being driven by demand like it was during the housing boom, but by declining supply. And the drag from shadow inventory was also a lot lower than expected.
In a note out yesterday, Capital Economics’ Paul Diggle also upwardly revised his home price forecast to 8 percent for the year, up from his previous call for a 5 percent rise.
“Prices of both new and existing homes are picking up, the latter by over 10% year-on- year. Indeed, after a couple of years during which new house prices outperformed, primarily owing to builders constructing more homes for the higher-end market, we now expect existing house prices to close the gap.
As more consumers are able to access mortgage credit, homebuilders should widen their offering, while continued investment demand will bid up existing house prices.”
And Ivy Zelman was on CNBC yesterday saying “we’re in a nirvana for housing. I’m the most bullish I’ve ever been”.
BAML’s economists expect home prices to rise despite tepid economic growth. This is because the Fed will continue to keep mortgage rates low. Only a huge jolt to the payrolls would hurt the housing recovery.
Both BAML economists and Diggle however expect the pace of home price growth to decline in 2014. BAML forecasts 6.5 percent in 2014. Diggle expects 5 percent growth in 2014 and 2015 because he thinks large gains in home prices can’t be sustained through investor demand.