Home prices to rise 15% in the next 3 years?

Economist for NAR sees prices going up 5 percent a year, but other analysts are less optimistic. Some of the increase is likely to be inflation, no matter who's counting.

by Teresa Mears

Source: MSN Real Estate

Not only is the housing recovery well under way, the median home value will rise 15% in the next three years, or at least that’s the view of the National Association of Realtors’ chief economist.

"Existing-home sales, new-home sales and housing starts are all recording notable gains this year in contrast with suppressed activity in the previous four years, and all of the major home-price measures are showing sustained increases," Lawrence Yun told attendees at the 2012 Realtors Conference and Expo in Orlando, Fla.

"Real estate will be a hedge against inflation, with values rising 15% cumulatively over the next three years, also meaning there will be fewer upside-down homeowners."

He predicts sales of existing homes will rise 9% this year, to 4.64 million, an additional 8.7% next year, to 5.05 million, and to a total of 5.3 million in 2014. He expects sales of 368,000 new homes this year and 575,000 next year.

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One reason for the rising prices is the falling inventory, which is fueling demand for new construction, perhaps beyond what builders can produce.

"Unless building activity returns to normal levels in the next couple years, housing shortages could cause home prices to accelerate, and the movement of home prices will be closely tied to the level of housing starts," Yun said.

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By 2014, the percentage of sales that are distressed homes should fall from the current 25% to about 8%, Yun predicted.

That doesn’t mean the foreclosure crisis is over, said Mark Vitner, managing director and senior economist at Wells Fargo, who also spoke at the conference. "Distressed homes right now are like an after-Christmas sale,’’ he said. “Most of the best stuff has been picked over, but make no mistake they'll be with us for a while."

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Not all analysts are as optimistic as Yun, though the predictions are closer than they look if inflation picks up.

Bank of America Merrill Lynch analysts predict average appreciation of 3.3% a year over the next 10 years.

Forbes contributor Bill Conerly, a senior fellow at the National Center for Policy Analysis, points out that the current price appreciation is being driven by a decline in supply and underbuilding in recent years. He writes:

Home prices will rise in 2013, but only modestly. The most recent data suggest that national average housing prices are rising by roughly a 5% percent annual rate. That’s too optimistic a projection for the next few years, however, because there are many owners of multiple underwater properties who will sell as soon as they don’t have to lay out cash. That increased number of houses on the market will limit price hikes.

Business cycles aside, there is not much reason for housing prices to appreciate by more than 3% plus inflation, or about 5% percent in this current environment.