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US home prices set for 8pc surge, says Bank of America report

PUBLISHED : Wednesday, 13 March, 2013, 12:00am
UPDATED : Wednesday, 13 March, 2013, 5:06am

US home prices will probably rise 8 per cent this year, up from a previous estimate of a 4.7 per cent increase, according to Bank of America.

Low interest rates, a tight inventory of properties for sale and record affordability are fuelling accelerated price gains, Michelle Meyer, a Bank of America economist, and Chris Flanagan and Justin Borst, mortgage-backed securities strategists, said in a note to investors entitled "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.

"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 per cent, according to the 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."

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 four years. Starts will total about 650,000 this year, about half the long-term "normal" pace of 1.3 million, said the National Association of Home Builders.

Home price gains will moderate to 6.5 per cent next year, then 3.7 per cent in 2015 and 1.7 per cent in 2016, said the report.