How much will home prices increase in the next decade?

According to a Bloomberg report, JPMorgan Chase & Co. (JPM) more than doubled its forecast for U.S. home price gains in 2013 to 7 percent this week, and predicts a more than 14 percent increase through 2015. Bank of America Corp. (BAC) said last week property values will jump 8 percent this year, up from a prior estimate of 4.7 percent in a report titled “Someone say house party?”

I have previously written that I expect any surprise in 2013 to be on the upside. I also reported a recent open house in Marblehead on a snowy and blustery day when 30 people showed up and multiple offers were received. Then last week before a new property came on the open market it received several offers above the asking price.

This week I heard an interview with Stuart Miller, the CEO of Lennar, an $8 billion homebuilding company. When asked about home prices, Mr.Miller pointed out that a jump in prices should be no surprise. The market had suffered an over-correction and was now reverting to normal.

Four million fewer households today own their homes than in 2004; new home construction is well below the rate needed to match new household formation; and mortgage rates are close to all-time lows.

And as the next two charts show, home ownership is at or close to its most affordable since these records were kept.

The first shows the ratio of average mortgage payments to median income:

Source: LPS Applied Analytics

and the second is the NAR’s Affordability index:

Pundits tend to make predictions based upon the immediate past (because, as somebody once said, it’s easier to predict the past than the future).

Here’s a chart I have published before, showing the median price of a SFH in Marblehead since 1993.

Source: Oliver Reports

The median price doubled in the ten years between 1993 and 2003, but that was a compound annual growth rate of no more than 7.6%. In the nine years since 2003 prices have been essentially flat. Over the entire 19 years, the compound growth rate has been just 4.1%.

Ah, the power of compounding! All it takes is a few years of 5,6,7% growth – nothing too extravagant – and a significant increase is achieved.

I am not predicting a doubling of prices over the next ten years, but neither would I be surprised if that were to happen.

I wonder what the pundits were predicting in 1993?