Wells Fargo Economists’ Outlook at Odds with Recent Home Price Data

What’s ahead for housing in 2014? The economics team at Wells Fargo Securities is forecasting a pull-back in investor activity, and with the fundamentals underlying housing demand, job and income growth, and household formations making only modest strides in a relatively thin market, they say to look for modest gains in home sales and residential construction with price appreciation decelerating back into the mid to low single digits.

“We remain optimistic about the housing market, but we still maintain our below-consensus forecast for home sales and new home construction in 2014,” Wells’ economics group wrote in a special commentary released last week.

“Our cautious outlook for home sales and new home construction may seem at odds with the recent home price data,” Wells’ economists admitted. (According to CoreLogic, home prices jumped 11.8 percent over the past year.)

They note the foreclosure backlog, and all its associated problems, has been greatly alleviated, and at the same time, home prices have bounced back in many markets.

However, their report points out that the turnaround in home prices was “exaggerated” by the influx of investors, concentrated in markets where price corrections overshot the most.

Housing activity started out strong in 2013, but sales recoiled when the Federal Reserve’s intent to begin winding down its monthly securities purchases became apparent, according to the economists. The earlier-than-expected talk about tapering pushed mortgage rates higher, which coupled with higher home prices, caused many potential buyers to take a step back. The result was a slowdown in the sales of new and existing homes, Wells’ economics team explained.

Mortgage rates, however, pulled back toward year-end, reviving demand in the midst of improving employment conditions, data collected by the bank’s economists shows. This momentum has continued into the new year as housing activity has “gotten off to a solid start,” they said.

Economic growth is improving, with consumers opening up their wallets and spending more freely than they have in recent years, the Wells economists explained. In addition, they say homebuilders are reporting an increase in buyer traffic.

With housing and economic indicators gaining better footing, builders and real estate agents appear to be generally upbeat going into 2014, according to Wells Fargo’s economics group, particularly in parts of the country where employment and incomes are growing solidly. The bank says homeowners also seem more upbeat, and encouraged by rising home prices, they’re putting their homes up for sale and adding much needed inventory to the marketplace.

Consumer attitudes about buying a home have improved also, Wells Fargo says, citing the most recent Consumer Confidence Survey results, which show the proportion of households planning to buy a home within the next six months jumped 1.9 points in December to 6.9 percent—that brings the measure back to its highest level since the recession ended.

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