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Pending home sales mirror pre-crash levels

Yet, analysts say falling prices are not in the cards

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Pending home sales fell steadily from May to December last year, closely mirroring the trajectory of the same economic indicator months before the 2007 home price crash, analysts Chris Flanagan and Justin Borst with Bank of America-Merrill Lynch claim in a new report. 

But don’t get sour on housing just yet, or assume we are in store for another home price crash.

While pending home sales fell sharply in December — and experienced steady declines last year — other factors, not existent in 2007, are likely to save housing from a free-fall in prices, the two researchers say.

But before analyzing the year 2014, we have to look back to 2007 when a quiet housing storm was silently brewing in America.

Fortunately, unlike 2007, current housing prices are closer to fair market values and inventory levels remain constrained. Buffered by these two factors, a wide swing in prices is unlikely, the researchers said. On the other hand, the perfect storm of 2007 had additional headwinds in the form of excess inventory and steep price drops from peak levels.

Yes, it’s true year-over-year growth has likely reached its peak and growth will be slower in the future, but Borst and Flanagan are still calling for 5% home price growth in 2014.  

In fact, prices are unlikely to move dramatically, they say, since mortgage credit is still wound tight and builders are not creating excess housing supply.

As long as builders don’t pick up the pace, home prices — even if escalating only modestly — are more likely to stay firm, the analysts claim.
 

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