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Wall Street: Home price appreciation still expected to hit 7%

And other housing insights from Morgan Stanley and Barclays

Increase graph

Despite a weak first quarter, home prices are still expected to rise by 7% in 2014, according to Wall Street analysts.

“We continue to expect home price appreciation to moderate from the torrid pace of mid-2012-13, supported by improving employment and growth prospects,” said analysts from Morgan Stanley (MS). “We leave our 2014 projections for new home sales (450-500 thousand units) and home prices (up 5-7% for the year) unchanged.”

Analysts from Barclays (BCS) agree. “Our base case projection for 2014 US home price appreciation is unchanged at 7%,” said analysts from Barclays.

Below are five other housing insights from Morgan Stanley and Barclays analysts:

1. Barclays’ analysts highlight the projected home price appreciation for the four “sand states”: Arizona, California, Florida and Nevada

Barclays’ raised its home price appreciation projections for Arizona and Florida from its previously reported projections. Barclays’ projection for Arizona was raised from 6.8% to 8.2% and Florida was raised from 7.7% to 8.3%. Barclays’ expectation for California remains static at 9.4%.

On the other hand, Barclays’ home price appreciation prediction for Nevada was dropped from 12.9% to 11%.

2. Morgan Stanley analysts downgrade their projections for existing home sales in 2014

Morgan Stanley’s analysts are now projecting existing home sales to between 4.75 and 5 million units, down from their previous projection of 5.25-5.75 million units.

3. What explains the weakness in housing right now?

“In our view, the rationale for the weakness comes from a combination of three factors – severe winter weather; a transition away from investors reliant on distressed and cash purchases to mortgage credit- dependent buyers; and affordability challenges for first-time homebuyers,” Morgan Stanley’s analysts said.

The analysts also cite the nearly 20% of homeowners that remain underwater as of the fourth quarter of 2013. The analysts say that the concept of moving is especially challenging for these homeowners.

"Not only would the homeowners have to put up cash to make up the difference between the outstanding mortgage balance and the sale price of the house, but they would also need to find the money for the down payment on their new property,” the analysts said.

4. What’s the story out West?

Morgan Stanley’s analysts note that home sales are down in the western part of the country. That area is not as susceptible to a winter slowdown due to its milder climate. The analysts suggest that the slow down in the West is due to decline of distressed transactions and “the constraints faced by the traditional mortgage-dependent buyers.”

5. It’s not all bad news, right?

Despite the negative indicators, Morgan Stanley’s analysts are still “constructive” on the prospects for an ongoing housing recovery. But they caution that the data from the spring selling season bears watching closely for signs that may cause a re-evaluation of their “constructive” view of housing.

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