Tempering bubble talk with more pragmatic foresight, Capital Economics says the housing market is due for a bit of a reality check, even as the recovery continues.
Recent double-digit, year-over-year price increases are set to ease later this year and slow even more in 2014 in a more sustainable alignment with earnings.
In a more liberal forecast than other real estate outlooks, Capital Economics says the pace of year over year home price gains will slow from the current 10 to 12 percent to 8 percent this year, but get halved to 4 percent in 2014.
How so? By three measures.
Double-digit price gains out of the housing recovery gate were never sustainable.
While housing remains under valued, housing bubble talk is premature, but the recent pace of price gains isn't sustainable. If prices continue rising at 12 percent, year-over-year, housing will be over valued relative to rents in the next few months and relative to incomes in early 2015.
Capital Economics says, "Combined with the assumption that mortgage interest rates settle at their current 4.2 percent level, mortgage servicing costs will rise by 2 percent to 3 percent of income each year. That could approach bubble territory.
Skyrocketing home prices are, in part, due to investors who are now leaving the spoils because they have to work harder to make investment deals pencil.