Home price appreciation (HPA) is expected to hit bottom in 2Q11, according to the National Association of Realtors (NAR) Affordability Index, Bank of America Merrill Lynch analysts reported.

BofA Merrill analysts added that related risky assets such as ABX, CMBX, and bank stocks are reaching their individual lows as well.

New volatility and caution in the market for both lenders and buyers has caused uncertainty on the future of the market, but the report suggested that a bounce back is likely due to previous trends in HPA data seen in 2006 and 2009. 

The NAR Affordability Index, a function of home prices income, and mortgage rates for conforming mortgages, has struggled in its effectiveness during the financial crisis, analysts said. Currently, the index is at an all time high while home prices continue to decline. The discrepancy, analysts believe, results from a lack of ability to reflect credit availability and homebuyer price expectations.

Despite these problems, the NAR index still serves a good indicator of home price growth and provides insight into future growth expectations, analysts stated.

While the recovery could potentially be slowed by external factors such as inventory and policy issues, the BofA Merrill report predicted that the HPA and its related assets’ prices will bottom in the next one to two quarters

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