A new report by Bank of America Merrill Lynch analysts suggested that home price appreciation (HPA) might have actually hit its double-dip bottom in March at -6.1%, earlier than what they had previously predicted in a previous report released a week earlier.
The analysts' conclusion was made based on an observed gain in both the HPA and the Federal Housing Finance Agency home price index in April.
Analysts stressed that this was “very good and important news”, and believed it might have gone unnoticed by investors because of the market turmoil caused by the Greek crisis.
The news is especially significant, according to analysts, because of the historical positive correlation between the HPA and the price movement of risky assets such as ABX and CMBX. A bottoming of the HPA would likely signal a bottoming of these risky securities, which BofA Merrill analysts think happened this week.
As reported by ASR last week, and reiterated in BofA Merrill's latest report, analysts expect a slow and uncertain rate of recovery for HPA.
The analysts said that while the pace of asset price appreciation could also be very sluggish, they are confident that now provides an “extremely attractive entry point” for yield buyers hoping to evade asset price decreases. Overall, BofA Merrill recommended that investors increase their exposure to riskier assets in securitized products.
The report also emphasized that it was discussing the bottom of the one-year growth rate for the home price indices, which is different from home prices. BofA Merrill analysts believe the latter will not bottom until 1Q12. They predicted that despite a potential increase due to seasonal factors in the coming months, prices will ultimately fall another 3% from 1Q11 levels before hitting bottom.
HPA is expected to stay in negative territory through the end of 2012, before entering positive territory for a lengthy period of growth, according to the report. Analysts consider HPA to be a valuable source of inference since they think it is the basis of subprime MBS betting. They cited similar events in the early 1990s to further support their theory.
For ASR’s coverage on last week’s BofA report predicting the double-dip bottoming of HPA, please click here.