Capital Economics Revises Forecast as Market Strengthens

Strong positive indicators in the housing market have ""Capital Economics"":http://www.capitaleconomics.com/ revising its predictions on growth in 2013 and beyond.

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According to the firm's most recent _US Housing Market Analyst_ report, Capital Economics foresees ""further strong gains in home sales and housing starts in 2013,"" as well as improvements in prices and mortgage activity.

While the United States faces a number of major hurdles--including the growing threat of the fiscal cliff and fallout from the ongoing euro-zone crisis--analysts for the company expect approximately 2 percent overall economic growth in 2013, lower than the 2.2 percent projected for 2012. While that rate of improvement may not impress, they note that ""the building blocks for faster growth further ahead are falling into place,"" predicting 2.5 percent annual growth in 2014-2016.

Against that backdrop, Capital Economics expects the housing recovery to march on.

Total home sales for 2012 are forecast at 5.0 million, followed by 5.3 million in 2013 and 5.4 million in 2014. While sales will continue to increase each year, growth is expected to slow to about 0.1 million more home sales each year.

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According to the report, ""[t]he improvement in sales will continue to owe a good deal to investors and cash buyers, who are attracted to housing by the sheer extent to which it is undervalued and the prospects for strong rental market demand.""

In a ""recent examination of the market"":https://themreport.com/articles/capital-economics-recovery-is-real-deal-2012-11-29, analysts for the firm warned that investors will soon start pulling out as the very recovery they created drives them away. However, with consumer demand for mortgages making a comeback, the market may not be so dangerously dependent on investor activity in the future.

Another headwind facing housing is the oft-cited ""shadow inventory"" that threatens to flood supply and wash away this year's price gains. While Capital Economics acknowledges the ""substantial overhang of properties in the shadow inventory,"" analysts believe the supply will continue trickling into the market, keeping conditions relatively tight compared to rising demand.

Taken together, the tight supply and increased demand are expected to create continued price gains. Capital Economics forecasts a 5 percent increase in prices in 2013 and 4 percent annual gains for the next several years after that.

While that forecast doesn't take into account the downside risks from today's unresolved financial crises, the company points out that there are also upside risks as market supply conditions continue to tighten. In the best case scenario, prices could rise by up to 10 percent next year.

At the same time, projections for homebuilding volumes have been revised upward in response to strong gains throughout the year and in the last several months in particular. Analysts anticipate starts to come in at 778,000 at the end of 2012, rising to 950,000 in 2013 and 1.05 million in 2014.