Firm Forecasts 8% Increase in Prices, Decrease in Mortgage Rates

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The pace at which home prices are rising should moderate later this year, with home prices forecast to rise by 8 percent this year then increase by another 4 percent in 2014, according to an analysis from Capital Economics.

Although the research firm agrees with analysts who have warned recent home price gains are not sustainable, housing bubble concerns were described as “premature.”

In the firm’s housing report for Q2, economists Ed Stansfield and Paul Diggle wrote, “[t]he bottom line is that valuation and affordability metrics suggest that house prices can rise considerably further before we need to begin worrying about another housing bubble forming.”

According to the firm, housing is actually undervalued by about 16 percent.

Capital Economics also waved off concerns regarding rapid price increases in Miami and Phoenix, noting metros where prices fell the furthest are seeing the biggest gains, and overall, prices “almost everywhere” still have a ways to go before reaching “bubble-era highs.”

Unlike other projections, the firm also doesn’t expect to see a swift increase in mortgage rates over the next year.

“In fact, our central view assumes that another flare-up in the euro-zone crisis prompts renewed safe-haven demand, resulting in a decline in Treasury yields and mortgage rates later this year,” the report stated.

As for the rental sector, the firm projects rental returns will peak in 2013 and forecasts yields will average 8 to 10 percent over the next few years. However, the firm expects the owner occupant market to strengthen and for demand in rents to weaken, with increases in rents ranging between 2.5 and 4 percent.

Capital Economics also offered predictions for existing-home sales, forecasting sales will reach 5.1 million this year and then rise to 5.3 million in 2014.




By Esther Cho

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