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Home Prices Are Expected to Peak in 2016, Then Do Pretty Much Nothing Through 2022


Are you still looking to buy a place before time runs out? Don’t want to miss out on the next big housing boom?

Well, it might already be too late, assuming you’re looking to turn a big profit, or any profit at all.

A new report from two bond strategists at Bank of America Merrill Lynch, whose merger was a direct result of the latest financial crisis, predicts little upside from current levels.

In fact, after a couple years of modest growth, home prices are basically expected to go nowhere for the foreseeable future.

Home Prices Are Nearly 10% Overvalued Today

The pair, Chris Flanagan and Gregory Fitter, contends that U.S. home prices are now 9.7% overvalued relative to household incomes, using the S&P/Case-Shiller Home Price Index as the measuring stick.

Simply put, incomes haven’t done a whole lot lately, but home prices (as we all know) have surged since the crisis abated.

In fact, even after chalking double-digit gains from 2012 to 2013, asking prices in many hot markets are still more than 10% above year-ago levels.

According to their math, home prices were about six percent below fair value at the end of 2011. So it looks as if we overshot the mark once more.

Unfortunately, after stellar gains like that it’s pretty difficult to keep the momentum going, even with limited supply and low mortgage rates available.

After all, affordability has its limits, and it’s finally being tested after a few silly good years.

Not Much to Look Forward to Now

While they noted that their outlook is “well out of consensus,” Flanagan and Fitter only see home prices rising another three percent annually each year for the next two years.

That would push home prices to a level that is around 12% above fair value as determined by household income, compared to six percent below fair value when home prices bottomed in late 2011.

Then from 2016 to 2022, their model forecasts modest declines followed by an eventual recovery resulting in flat net annualized home price gains over that period.

In other words, after this current seller’s market spits out a few more nominal gains, home prices are going to settle into a range and stay there. Of course, that’s not necessarily a bad thing.

In fact, the pair thinks it’s a “fantastic outcome” and just what policymakers had in mind when establishing new regulatory framework and lending laws.

Their research echoes that of Trulia’s Bubble Watch, which revealed that home prices were still about three percent undervalued, but expected to be just right by the end of the year, or early next year.

The takeaway here is that no one wants another housing bubble just years after the worst financial crisis in recent history.

So yes, it’s a bummer that home prices aren’t going to continue flying higher and higher, but it should mean a more sustainable market for years to come.

Of course, these are all just assumptions and predictions. Economists are often wrong (and typically never right), so taking their word for it is a bit of a stretch as well.

Additionally, I doubt any model predicted home prices would rise as much as they did during the last boom, so assuming they won’t deviate from “normal levels” this time around is also hard to swallow.

Lastly, remember that this is the national picture, and that home prices can and will vary tremendously from metro to metro.

I’m just curious what will happen after 2022…

3 thoughts on “Home Prices Are Expected to Peak in 2016, Then Do Pretty Much Nothing Through 2022”

  1. We put our house on the market in 2014 for the summer months and back on in 2015 for the summer months. The house was appraised by the realtors and lowered two times.
    We have had a pretty good turn out and all claim they love the place, but we have not had one offer. What could be the problem?

  2. Mel,

    No idea without seeing the home unfortunately…could be all sorts of things. If you think it’s priced right maybe something is turning everyone off?

  3. With Fannie Mae and Freddie Mac introducing new lending requirements for “poor borrowers” that allow a NON borrower’s income to be considered for debt ratio allowances, I predict we will see new exploitations of this. I’m pretty sure the lack of verified income was how that last housing crisis happened. I can just see the bank statements on these subprime borrowers and the loan officers making up phantom income sources based on non-verifiable income again. Housing bubble, here we come!

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