CoreLogic reported another strong month-over-month U.S. home price appreciation (HPA) of 16.3%, which is the non-seasonally adjusted annualized rate for July 2012. This decreased from June's 25.7% rate.

Bank of America Merrill Lynch analysts, however, said that June was revised up from an initial 16.7% reading and still showed the continued surprising strength in 2012's HPA.

They added the month's strong reading and the strong 1.2% 2Q12 Case-Shiller number as well as the chance for future upward revisions have made them think that there is upside risk to their 2012 Case-Shiller national composite forecast of 2.2% (q4/q4). Analysts now believe in the strong chance of a final 2012 number in the 3% to 4% range.

The continued price growth in most markets should lead to increased recovery values for non-agency MBS investors, analysts said. Due to this, although the market has started to price in improved collateral assumptions, analysts still see relative value in non-agency MBS. They still suggest last cash-flow subprime bonds, which can benefit the most from this home price recovery.

More Upward HPI Numbers

Non-distressed home prices increased at a 22.9% annualized pace. The year-over-year price growth through July was 3.8%, which is the largest rise since August 2006. Year-to-date, the data firm reported home prices have increased 8.1% through July or 14.3% on an annualized basis.  

Analysts expect that non-seasonally adjusted price growth will further drop versus May's peak. They also thiink that prices will soften on a seasonally adjusted basis, although not as significantly as the non-seasonally adjusted data.

The major factors driving the strength in home price indices have been the inventory drop and the the distressed sale share dip versus analysts' expectations. Additionally, the increased use of short sales versus REO sales as a distressed sale is offering further support to home prices.

Analysts are awaiting more confirmation of these trends prior to formally revising their HPA expectations higher, although these are the factors that have created the upside risk to their forecast. They still think that home prices have bottomed and that positive long-term price growth remains on the horizon.  

All 20 MSAs tracked by CoreLogic rose in July, cited BofA Merrill analysts. The top-performing cities in rank order were Miami (48.1%), Philadelphia (42.8%), Atlanta (42.8%), New York (41.8%), Cleveland (38.4%), and Chicago (35.1%).

Although the recent price growth in Atlanta and Chicago gives some encouragement, analysts said that they still saw negative year-over-year growth for both at -0.3% and -1.4%, respectively. The two MSAs have experienced a considerable drop in the percentage of distressed sales this year, with Chicago falling 12 percentage points to 25.4% and Atlanta dipping 9.2 percentage points to 29.6% through June.

According to analysts, the data implies that this has been a result of higher sales to individual consumers and an REO inventory drop in available-for-sale properties in these areas. 


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