Elusive Bottom for Home Prices Near, Forecast Says

By Alexandra Scaggs

Improving economic data and government-policy developments have led Bank of America/Merrill Lynch to call for the long-awaited bottom in housing prices this year.

The firm tweaked its forecast from November, when it expected home prices to fall 3.5% in 2012. Now, it expects a modest gain of 0.5%, a good sign for the sector that continues limping through its worst downturn in generations.

Still, “along with the earlier bottom is a slower recovery,” the firm warns. It expects home prices to gain 2.8% in 2014, solidly below its prior estimate of 8.1%. Its prediction for 2020 remains roughly the same, when it expects beaten-down home prices to have recovered by 42%.

Inventory dropped sharply in the second half of last year, according to the firm’s research. And while BofA/Merrill expects those numbers to pick up because winter’s unseasonable warmth may have already supported home sales, it now expects lower inventory levels than previously thought. Also, recent trends of higher-than-expected job creation and record-low mortgage rates, the firm said, further support the case that housing is undervalued.

The note’s authors—MBS/ABS Strategists Ryan Asato and Chris Flanagan and U.S. Economist Michelle Meyer—wrote that government policies have helped the market as well. While no recent moves have been a panacea for home prices, “they represent a positive step forward.” The firm mentioned a settlement involving state and federal officials and U.S. banks on foreclosure practices and easier refinancing for homeowners as two of these.

However, the firm writes that its outlook could easily change if policies or macroeconomic factors do. If the U.S. economy weakens again in the second half of 2012, housing demand will fall, resulting in continued price declines. And even with this year’s bottom, it will take years for the market to recover in full. “Although the housing market is healing, it is still far from a robust recovery.”

To be sure, some industry watchers aren’t as optimistic because the market faces continued headwinds. Foreclosures remain a stubborn issue, while lending standards remain strict for many would-be buyers. The rental market poses stiff competition, while many consumers remain too afraid to buy homes.

“Despite the optimistic signs from the selling season, we remain cautious,” David Goldberg, a home builder analyst with UBS, wrote in a client note.

–Dawn Wotapka contributed to this post.

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