Bank of America Raises Forecast for Gain in Home Prices

U.S. home prices probably will rise 8 percent this year, up from a previous estimate of a 4.7 percent increase, according to Bank of America Corp.

Low interest rates, a tight inventory of properties for sale and record affordability are fueling accelerated price gains, Michelle Meyer, a Bank of America U.S. economist, and Chris Flanagan and Justin Borst, mortgage-backed securities strategists, said in a note to investors titled “Someone say house party?”

“We believe a positive feedback loop has begun, where the rise in home prices fuels expectations of further appreciation and easing credit conditions, which in turn stimulates homebuying,” they said in the report, dated yesterday. “It is a powerful positive relationship especially in this environment of historically low interest rates and a Federal Reserve determined to keep policy accommodative.”

Home prices began rising last year after the worst housing crash since the Great Depression as unemployment declined, mortgage rates fell to record lows and a shrinking pool of listings sparked competition among buyers. Prices last year climbed 7.3 percent, according to the Bank of America report.

“Housing inventory has continued to decline, implying that the supply of homes on the market for sale is undershooting demand,” Flanagan, Meyer and Borst wrote. “This is back to the pace during the housing bubble. Unlike the bubble, the reason for the decline in inventory is not surging demand but rather subpar supply.”

New Homes

Rising demand has sparked a revival of new-home sales, which hit a 50-year low in 2011. New-home sales rose to an annual pace of 437,000 in January, the highest rate since July 2008, according to the Commerce Department. Single-family starts rose to 613,000 in January, the most in more than four years. Starts will total about 650,000 this year, about half the long-term “normal” pace of 1.3 million, according to the National Association of Home Builders.

Home price gains will moderate to 6.5 percent in 2014 -- revised from a previous estimate of a 7.7 percent increase -- then 3.7 percent in 2015 and 1.7 percent in 2016, according to the Bank of America report.

“Our forecast now assumes faster near-term appreciation, but slower growth in the out years,” Flanagan, Meyer and Borst wrote. “Our forecast for the cumulative appreciation over the next 10 years is little changed.”