Altos predicts a 'catfish recovery' for housing market
Historically, the normal housing market is volatile, and finding the inflection points for when prices bottom or surface at the ZIP code level is essential for netting a profit when it comes time to unload a property, according to a presentation from Altos Research. The S&P/Case-Shiller housing index showed a new low for home prices in the first quarter of 2011. But Scott Sambucci, the vice president of market analytics at Altos, said he and his team disagree with the chairman of the S&P/Case-Shiller index committee when he said prices would continue "their downward spiral with no relief in sight." "We were quite surprised to see that," Sambucci told a group of housing investors during a presentation Thursday. "We are actually showing an uptick. There's still plenty of upside." Going into the summer, this new bottom for the housing market, Sambucci said, should prove to be the start of a new housing cycle. (Click to expand.) In 2008, as owners were trying to unload property before a complete housing collapse, prices went on the decline as inventories climbed. Then in 2009, inventory went back down as banks and investors bid and bought some of those same homes that were on the market in 2008. Prices began moving up. But in 2010, homes began moving through the constricted pipeline of foreclosures and came out of the otherside as REO. This inventory rose in early 2010, and prices followed temporarily as eager homebuyers looked to take advantage of the homebuyer tax credit. What was followed was rocky descent to a new bottom by the end of March. Going forward, Sambucci said inventories and prices will begin moving back up as part of the new cycle. For the first-time in four years, data shows inventory and prices will be moving up and down simultaneously in what is historically a volatile market. Looking at June data, the price of new listings have been accelerating upward rapidly since the start of spring. Sambucci said these higher initial prices for new home listings are pushing prices higher for the existing inventory. This data, he said, is not being caught in other lagging indices. Sambucci calls it a "catfish recovery." "Think of the behavior of a catfish," Sambucci said. "It will be a bottom-dweller, then it comes to the surface for a while and then heads back down. It's bouncing around. It doesn't have a clear pattern or distinct trend. It's important to understand that moving forward, if you understand volatility, there are possibilities to make money on these inflection points." Story of Sacramento Altos analysts scoured data on the ZIP code level and found a case study for how a bank could have avoided losses had it anticipated volatility. In West Sacramento, prices fell in one particular ZIP code to just above $100,000 as of the end of June from the $300,000 range in 2008. One home, an REO, came onto the market there at $98,000 in April. But the bank had to reduce the price to $84,900 in May then made another cut to $78,900 in June. Sambucci pointed, that as of June, most of the other homes in the area have spent less time on the market. One of these properties, which isn't a foreclosure, had its price marked down to $79,000 as well. Had the bank priced the REO a little bit lower than $98,000 when it first hit the market, when there was less competition, it might have sold before the other homes came in, and the bank could have taken it off the books. It has since been sitting on the market now for 98 days. History shows volatility "The notion that the housing market would hit bottom and head back up consistently is simply ignoring history," Sambucci said. "There's plenty of proof and plenty of historical data that shows continued volatility for a long period of time." He pointed to the chart below created by Yale economist Robert Shiller, which showed house price changes since 1890. (Click to expand.) The rare occasions of consistent boom years such as the housing bubble of the mid-2000s, were followed by extended periods of volatile up and down movement. Investors owning residential mortgage-backed securities will have to measure where these loans are to understand future defaults. High loan-to-value ratios are a key indicator of such a default. If prices drop, the value of the home quickly becomes worth much less than what's owed on the loan. But the steepness of the drop is just as important as when it will occur. Should a group of loans go from 140% LTV to 155% LTV, the default risk will merely remain very high, but if it goes from 105% LTV to 135% LTV, the risk goes up. And just the opposite poses a risk as well. If prices improve suddenly, LTVs come down and the prepayment risk — when a borrower becomes able to refinance into a more affordable mortgage — increases for the investor. "If the market starts to improve again, and bond prices approach par, it might be better to unload and wait for the market to come back down again. Just when you think it doesn't seem it couldn't be any worse as you see in the headlines, maybe it's the time to buy again. Just take the ride up and down," Sambucci said. In either case, Sambucci concludes that prices naturally behave like the catfish, and the adage that prices would trend in one direction or the other gradually coming out of a period of boom or bust is simply not supported by history. "The normal market is volatile," Sambucci said. Write to Jon Prior. Follow him on Twitter @JonAPrior.