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National Housing Market | Posted on 03-29-2013 | Written by Brad Hunter

I had already been calling for strong home price increases in 2013, and the latest evidence in the market suggests that the increases may be even stronger than most are forecasting. I am now expecting price increases in the new home subdivisions of 9.0% in 2013, and in the best “A/B” submarkets, 11%-15%. These are same-project forecasts, not averages. Resale home prices will rise as well, but not quite as fast; homebuilders will be driven by extreme cost pressures, and consumer demand will continue to strengthen this year, allowing builders to pass along the higher costs.

By 2014/2015, however, I believe the pace of escalations will slow down again. There are three independent reasons for this.

1) Resale listings, now extremely low, will start to replenish.The main reason (on top of the recent investor buying spree) that there are fewer listings is that a large number of would-be sellers are holding their units off the market until prices go higher. It would not be surprising to see more homes get listed after another year of rising prices. That increased supply will then start to slow the rate of price increase. Another point: much has been made of the reduced number of listings of resale homes, and many commentators have pronounced based on this that “inventories” are low, but MLS listings do not truly equate to “inventories,” in that most of the homes on the MLS are occupied. Don’t call MLS listings “inventories”; finished-vacant new home supply is a much better leading indicator for home prices.

2) The rate of increase in lot prices is completely unsustainable, so as the rate of lot price increase eases, the pass-through pressure will subside (in the next year or two).

3) When mortgage rates move from the high 3%s to the 6% range, which is likely in the next three years, the monthly payment will be 33% higher, and that will limit how much people can spend on a home.

Also remember that an unusually large share of the home buying that has occurred so far has been by the move-up audience; once the first-time home buyers re-enter the new home market in large numbers, normal household economics will come back into play. Home prices cannot outstrip wage growth for too long (we’ve seen that movie before!).

Even after things slow down, the pace of new home price escalation should be well in excess of the general inflation rate. The 9% increase expected for 2013 will give way to a still-strong 6% rate in 2014, easing lower (read: back toward normal) in 2015. Part of the pattern that I’m watching is the mix-shift from “A” and “B” areas with $1,700/front foot lots to “C” submarkets with $900/front foot lots. The shift toward the “C” submarkets will pull down the average escalation rate, because those areas will still have a large amount of competition from short-sale and REO homes.