Things look better on the home front now compared to late last year, notes Bank of America Merrill Lynch, which revised its home price forecast Thursday to say “prices are bottoming now.”

In November, BofA Merrill Lynch analysts forecast home prices would fall another 8% from the second quarter of  2011 through the first quarter of 2013. But home prices only dipped 3.2% during the second half of 2011, implying they’d need to decline another 4% to 5% to reach the original estimate.
BofAML doesn’t think a drop that big is likely.
In fact, it now predicts roughly flat prices this year and next with modest growth in 2014, according to a forecast update from strategists Chris Flanagan and Ryan Asato and economist Michelle Meyer.
“But along with the earlier bottom is a slower recovery, and hence a flatter profile,” the analysts said. “We still believe prices should accelerate in the later years once the majority of the foreclosure inventory is absorbed, allowing prices to snap back to the trend in income.”
In the chart below, the first column of percentages represents the new forecast and the column to the far right shows the old forecast:

Analysts said a protracted bottom, which will last about two years, is due in part to policy initiatives such as the administration’s Home Affordable Modification Program, aimed a preventing foreclosures, and principal reductions that will be granted through the national attorneys general mortgage servicing settlement. The pilot program to rent out government-owned REO, for which BofAML has previously expressed support, and changes to the Home Affordable Refinance program also will have an impact.
“We do not believe any of these programs represents the ‘silver bullet’ for housing. However, taken together, they represent a positive step forward on the policy front,” the report said, noting that the AG settlement allows servers to move forward to more effectively service loans, foreclose when appropriate or originate new loans.
From 2012 through 2020 BofAML predicts cumulative growth of 42% in home prices — 4% on an annualized basis — comparable to its prior forecast.
BofAML expects the widely watched Case-Shiller home price index to fall 2% this quarter, reaching bottom at the end of March, with seasonal gains expected over the spring and summer and price declines over the winter. It cautioned against overacting to the choppy pattern.
The monthly inventory of available homes tumbled lower recently, reaching 6.4 months in February, down from 9.3 months in July 2011. In addition, the share of distressed sales also is on the decline. The revised report noted levels on both variables will be lower going forward than BofAML previously believed, although they expect them to modestly tick upward over the next two years.
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