Could the home price boom be ending?

by Ryan Smith18 Jul 2014
A new report suggests that the U.S. home price rebound is nearly over, and homeowners should prepare for several years of stagnant prices.

That isn’t the majority view, according to a Wall Street Journal report. Most economists predict that home prices will rise about 5% this year and keep rising at about 3% over the next few years. That’s because supply shortages are driving the market right now, and many economists predict that home prices will keep outpacing income and rent growth while inventory remains low, the Journal reported.

But a new report published by Chris Flanagan and Gregory Fitter, bond strategists at Bank of America Merrill Lynch, says that home prices are currently 9.7% overvalued. They forecast that home prices will rise 3% annually in the next two years, ending up at about 12% over the “fair value” mark determined by average incomes, the Journal reported.

In their forecast, that high would be followed by small declines over the next few years, resulting in net flat price gains through the middle of 2022.

That’s not to say housing markets are sitting on another bubble. Flanagan and Fitter say tougher regulations enacted since the financial meltdown should protect the market against the free-for-all lending standards that tanked it the last time, the Journal reported. On the contrary, their prediction of flat home prices between 2016 and 2022 “seems to us to be a fantastic outcome and exactly what policymakers had hoped for when establishing the new regulatory framework,” they wrote.

The report also points out that the pace of home price increases has already slowed, suggesting that the price boom “is most likely over.”
 

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