NAR Economist: Home Prices to Rise 15% in 3 Years

By: Kris Hudson and Dawn Wotapka

ORLANDO—National Association of Realtors Chief Economist Lawrence Yun foresees U.S. home prices rising by 15% over the next three years, a boost for the beleaguered housing market.

Mr. Yun is widely known for his optimistic forecasts, given his employer, the nation’s largest housing cheerleader. Still, any talk of rising home prices is welcome news. Home values have plunged a third or more from the peak, leaving millions of Americans underwater, or owing more than their mortgage, and unable to move. If their values increase, they might feel comfortable enough to buy a bigger home or retire to a smaller one, helping everyone from real-estate agents, who would earn a commission, to retailers selling everything from furniture to paint.

However, Mr. Yun expressed concern about home affordability, citing both supply and demand. Supply remains relatively scarce because builders are not producing as many homes as in past years. Mr. Yun predicts that construction will ramp up to 1.3 million units by 2014, but that still would be below the historic average of 1.5 million. One factor hampering construction: Small home builders still are having difficulty getting financing from local lenders.

“Builders need to add more,” Mr. Yun said at the group’s annual conference. “We need to moderate the price growth.”

If only it were that easy. Builders are dealing with increased labor and material costs, which threaten the nascent recovery. They also don’t want to build too many homes, just in case the economy weakens again. And, for builders, raising prices is a great thing—particularly if that trickles down to shareholders.

On the demand side, U.S. job growth has picked up, but it is, at best, keeping up with population growth. Many of the country’s new jobs are low-paying positions in retail, home health care and other such fields. Thus, U.S. household earnings aren’t growing robustly, and the country’s total employment level is not posting great gains. “Every single month, we would have to create 250,000 jobs for the next eight years to get back to normal” employment levels, Mr. Yun said.

An affordability gap could emerge if prices rise due to restricted supply and buyers lose momentum due to sluggish wage growth.

Mark Vitner, an economist with Wells Fargo,  predicted that mortgage rates will remain at historic lows through 2014, keeping home buying affordable. Mr. Vitner forecast that the rate on a traditional, 30-year mortgage, now at roughly 3.4%, will “bottom out” at 3.3% in next year’s first quarter amid concerns about federal budget-balancing efforts. “We will probably be at an all-time-low in interest rates late this year or early next year.”