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Bank Of America: Home Prices All Done Falling, Thank You Very Much

The Huffington Post  |  By Mark Gongloff  |  Posted: 03/22/2012 1:05 pm Updated: 03/22/2012 1:51 pm

Home Prices
Bank of America mortgage services representatives help register people looking for help with their mortgages during the Help for Homeowners Community Event at the James L. Knight Center on February 22, 2012 in Miami, Florida. Bank of America economists today forecast that home prices would rise in 2012.

Bank of America probably hopes its economists have this one right.

In a new research report on Thursday, Bank of America-Merrill Lynch mortgage strategists and economists boosted their forecast for U.S. home prices this year. They now see prices squeezing out a 0.5 percent gain. That doesn't sound like much, but it is up quite a lot from the bank's older forecast of a 3.5 percent fall in prices this year.

"More information has come our way since the initial forecast, including favorable developments on the policy front, better economic data and a decline in the supply of homes on the market," wrote Chris Flanagan, Michelle Meyer and Ryan Asato. "We have therefore updated our home price model and believe that prices are bottoming now."

Readers with functioning memories will immediately recall that economists have been getting housing calls wrong early and often -- before, during and after the housing bubble and crash. At one point, remember, it was gospel that house prices would never fall. And we have seen calls of housing bottoms again and again since prices began to fall back in 2006.

Today the Wall Street Journal once again wrote of signs of life in the housing market, but they also said: "Home prices have yet to hit bottom."

The Bank of America economists are a little more optimistic, though they still don't see prices rebounding any time soon. After basically flattening this year, prices will rise just 0.3 percent in 2013, according to their forecast. And it looks like price gains this year will steal from prices in future years: They've cut their 2013 price-gain forecast to 0.3 percent from 1.3 percent and slashed their 2014 forecast to a gain of just 2.8 percent from 8.1 percent previously.

That's going to be a frustrating slog, if true. But it's better than the alternative of prices still falling year after year, as they have each and every year since 2006. Nationally, home prices are down nearly 34 percent from their peak in 2006, according to S&P/Case-Shiller home-price indexes.

On Thursday, the Federal Housing Finance Agency said its home-price index, which tracks only houses with mortgages owned or backed by Freddie Mac or Fannie Mae, was flat in January. The FHFA price index is down 19 percent from its peak.

(Do yourself a favor and do not use the FHFA's home-price calculator, unless you feel like you're not quite depressed enough.)

Like many of us, Bank of America could sure use a home-price recovery. At the end of 2011, the bank had more than $398 billion in residential mortgage debt on its books, including home-equity lines of credit and a few scraps of pay-option and subprime loans left over from the good old days.

Rising home prices will help the bank by keeping more homeowners above water, where they'll be less tempted to swim away from their mortgages.

It will be a long time until house prices are really rising, even if the new Bank of America forecast is correct, a delay that the report blames on government policies to help homeowners:

The policy attempts have been aimed at preventing foreclosures, which has resulted in delaying the process. Our price forecast of a long and protracted bottom in home prices reflects this policy environment. We expect additional policy attempts to prevent foreclosures including Home Affordable Modification Program (HAMP) modifications and some limited debt forgiveness defined in the Attorneys General settlement.

The settlement referred to here is the $25 billion one with the federal and state governments over allegations of mortgage-foreclosure fraud by Bank of America and other big mortgage-servicing firms.

Still, these same government policies, though generally not nearly as effective as hoped, have prevented some foreclosures, the Bank of America economists wrote. That's a major reason they raised their forecast for prices in the short term:

The two most important short-term variables for our model are months’ supply, which is the ratio of inventory to sales, and the share of distressed sales. Both of these are affected by the flow of foreclosures into the market, which has slowed due to policy intervention.


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