Despite national home prices increasing by more than 2%, the largest gain since before the market peak, Fitch Ratings believes national prices are 10% overvalued.

However, during correction, home prices will likely drop by no more than 2% from today due to inflation.

Fitch reports technical factors behind the appreciation will eventually mute growth in the future, much to the opposition of current market predictions. The latest report from the Standard & Poor's/Case-Shiller Home Price Indices, for example, revealed that home prices continued to rise in October with prices up 4.3% annually.

While Fitch agrees that it’s hard to not be upbeat with home prices on the rise, indicating a healthy housing rebound, the ratings company is remaining cautious in its outlook based on the past few quarters.

“Many models place a high value on price momentum, which can skew long-term projections. Another factor differentiating our model from many in the market is that our projections are in real terms as opposed to nominal dollars,” said Stefan Hilts, director of Fitch Ratings.

According to Fitch’s 2Q12 price projection, low mortgage rates, a limited supply of homes for sale and a lack of new home construction are feeding demand and pushing home prices up. However, Fitch suggests that these factors are blanketing weak fundamentals that would otherwise hinder home price growth, such as high unemployment rates and a lack of wage growth — both show no indication of near-term improvement.

"While pent-up demand is helping to boost support for home prices in some markets, a truly robust long-term market requires strong employment trends,” noted Hilts.

In addition to the price projections, Fitch released its Sustainable Home Price model to identify the current degree of overvaluation in the market. Regionally, Fitch projects that many of the hardest hit markets will continue to post impressive recoveries, supported by fundamentals.

Click on the image below to see prices and the projected nominal paths.

mhopkins@housingwire.com