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Home Prices Heading Up

Capital Economics Revises Home Price Forecast Upward

Strong demand and tight inventory have brought existing home sales back to “normal” levels, and further gains are possible, according to the latest market report from Capital Economics. Additionally, market conditions may prompt lenders to “loosen the purse strings slightly” and lend a little more freely.

These conditions, combined with broader economic indicators, lead Capital Economics to revise its previous forecast of a 5 percent price gain this year up to 8 percent. Next year’s projection is a smaller 4 percent gain.

Much of the recent demand in the housing market has been the result of investment activity. Though an uptick in sales from one investor to another indicates some investors may be leaving the market, Capital Economics is confident investor demand will remain strong overall this year.

At the same time, Capital Economics suggests declines in both unemployment and delinquencies will make lending conditions more favorable, “allowing mortgage-dependent buyers to reenter the market.”

The analytics firm doesn’t anticipate any tightening of credit resulting from the Consumer Financial Protection Bureau’s impending regulations.

Existing home sales will rise to 5.1 million this year, and new home sales will rise to 0.5 million, up from last year’s 4.7 million and 0.4 million, respectively, according to Capital Economics’ projections. Sales in both categories will rise even further next year.

Mortgage rates, which have risen slightly, will not impede sales, according to the firm. Rates may fall again throughout the rest of the year, but even with recent increases affordability remains high.

Capital Economics expects inventory will remain tight but will not get tighter as the year progresses. Currently, the market holds about 4.6 months’ supply, which is the lowest inventory recorded in the past seven years, according to the firm.

The type of inventory on the market is in a transition mode as fewer foreclosures take place. “[M]ore homes that, a few years ago, would have come onto the market as foreclosures are now coming onto the market as short sales,” Capital Economics said.

Short sales often come at a smaller discount than foreclosures. Furthermore, foreclosed homes themselves are selling with smaller discounts.

During the housing crisis, foreclosed homes sold for about 30 percent less than equivalent non-foreclosed homes. Now, the difference is about 12 percent, according to Capital Economics.