altos research - the catfish recovery

Altos Research

Housing Double-Dip or a Catfish?Spring 2011 Webcast

June 2, 2011

Scott SambucciVice President, Market Analytics

scott@altosresearch.com(415) 931 7942

WHY WE’RE HERE

Today’s 2011 Market, not 3 or 6 months ago

Inventory affects price, sometimes“The Catfish Recovery”Volatility = Profit (but only for smart

people) Measuring Affordability (sorry, next time…)

Today’s once-in-a-lifetime offer

DON’T TRADE BASED ON THIS PRESENTATION. SERIOUSLY.

Disclaimer

This material is for distribution for marketing purposes only and should not be relied upon by any person for investment or financial decisions. This material is provided for informational purposes only and does not constitute a solicitation in any jurisdiction in which such solicitation is unlawful or to any person to whom it is unlawful. Moreover, it neither constitutes an offer to enter into an investment agreement with the recipient of this document nor an invitation to respond to it by making an offer to enter into an investment agreement.

This material may contain “forward-looking” information that is not purely historical in nature. Such information may include, among other things, projections, forecasts, estimates of yields or returns, and proposed or expected portfolio composition. No representation is made that the performance presented will be achieved by any investor, or that every assumption made in achieving, calculating or presenting either the forward-looking information or the historical performance information herein has been considered or stated in preparing this material. Any changes to assumptions that may have been made in preparing this material could have a material impact on the investment returns that are presented herein by way of example.

This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of November 2010 and may change as subsequent conditions vary. The information and opinions contained in this material are derived from proprietary and nonproprietary sources deemed by Altos Research to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. There is no guarantee that any forecasts made will come to pass. This document contains general information only and is not intended to represent general or specific investment advice. The information does not take into account your financial circumstances. An assessment should be made as to whether the information is appropriate for you having regard to your objectives, financial situation and needs.

©2011 Altos Research LLC, All Rights Reserved

OUR MANDATORY COMMERCIAL(the marketing team made me do this)

• Altos Research = real-time real estate & housing market analytics

• The only national source of primary data & analytics for the active housing market Listings IntelTM:

2 million active market properties updated weekly; Historical date & portfolio matching, and active comps in 20,000 zip

codes, 250+ MSAs/CBSAs. AltosEvaluateTM Mortgage Analytics Suite Forward Valuation ModelTM: Zip code-specific forecasting

models. MSA Forecasts Models: Market forecasts for the Case-

Shiller, RadarLogic, FHFA & other third-party HPIs.

(Note: Our clients are the smartest people we know)

Copyright Altos Research | www.altosresearch.com | 12/09/2010

If you do these things, you’re our customer:

• Whole Loan Asset Portfolios• RMBS Portfolios• REO Disposition• Mortgage Origination & Servicing• Valuation & Appraisal• Equity Researchers• Risk Management• Homebuilders & Developers• Insurance

May 31, 2011: “Home prices continue on their downward spiral with no relief in sight.” says David M. Blitzer, Chairman of the Index Committee at S&P Indices.

(Source: S&P Press release)

TODAY’S ACTIVE MARKET SIGNALING IMPROVEMENTS

Price of New Listings Indicator: Leads transaction prices by 3-6 months. New sellers pricing more confidently.

• Sell into short-term strength

• Buy when the market dips later this year

• Repeat for the next 10 years

PRICE SENSITIVITY TO INVENTORY CHANGES

Jan – Oct ‘08 Jan – Oct ‘09

Jan – Oct ‘10 Jan – May ‘11

Location, Location, Location:Altos Research Mid-Cities CompositeTM

MSAs Included in Altos Research Mid-Cities CompositeTM:

Dover, DEPittsburgh, PABaltimore, MDDurham, NCCharleston, SCNaples, FLJacksonville, FL Orlando, FL Nashville, TNMemphis, TNSt. Louis, MOAustin-Round Rock, TXSan Antonio, TXAlbuquerque, NM Reno, NV Boulder, CO Ventura, CASacramento, CABoise, IDHonolulu, HI

Mid-Cities CompositeTM exhibited less downside during crash & more seasonal stability .

More on this later…

ALTOS RESEARCH MID-CITIES COMPOSITETM:

SIMILAR MARKET EFFECTS WITH LOWER VOLATILITY

• Inventory & Price Reductions less volatile

• Fewer sub-prime mortgages

• Mix of bubble & non-bubble markets

THE CATFISH RECOVERY

THE CATFISH RECOVERY• Volatility. The “double dip” is only the start of the

next housing cycle. • Your long-term forecast is wrong.• Traders: Expect sporadic defaults in existing

securities, but will moving from 140 to 155 LTVs matter that much?– Some prepayment risk during upswings as ST activity

accelerates.– Sell high, Buy low. No really.

• Heading into the single best time to make $ in real estate and mortgages. But only for smart people. – “The housing market never goes down.” –CDO Trader,

circa 2006

THE NORMAL MARKET IS VOLATILE.• 2009-10 rebound manufactured by homebuyer

tax credit• Weak macroeconomic fundamentals persist• Generational demand shifts• Haphazard supply levels• We’ve measured up to12% annual volatility in the

Altos 20-City Composite and 7% in the Case-Shiller – Similar volatility from pre-1990s market periods– “This time is different”

THE CONSTANT GROWTH MYTH

Source: http://cafehayek.com/site/wp-content/uploads/2011/04/Case-Shiller-updated1.jpg

Jan-

09

Mar

-09

May

-09

Jul-0

9

Sep-

09

Nov-0

9

Jan-

10

Mar

-10

May

-10

Jul-1

0

Sep-

10

Nov-1

0

Jan-

11

Mar

-11

May

-11

-15.00%

-10.00%

-5.00%

0.00%

5.00%

10.00%

15.00%

$300,000

$320,000

$340,000

$360,000

$380,000

$400,000

$420,000

Altos % change fromlast peak/trough

Altos 20-City Composite

Apr-0

9

Jun-

09

Aug-0

9

Oct-0

9

Dec-0

9

Feb-

10

Apr-1

0

Jun-

10

Aug-1

0

Oct-1

0

Dec-1

0

Feb-

11

-8.00%-6.00%-4.00%-2.00%0.00%2.00%4.00%6.00%

132.00

136.00

140.00

144.00

148.00

SPCS20R % change from last peak/trough

SPCS20R

Altos Weekly obs.

date

Altos 20-City

Composite

Altos % change from

last peak/trough

9-Jan-09 $

357,057  

29-May-09 $

400,414 12.1%

26-Feb-10 $

367,649 -8.2%

4-Jun-10 $

373,086 1.5%

14-Jan-11 $

327,782 -12.1%

20-May-11 $

356,283 8.7%

Month SPCS20R

SPCS20R % change from

last peak/trough

Apr-09 139.26  

Sep-09 146.63 5.3%

Mar-10 143.34 -2.2%

Jul-10 148.89 3.9%

Mar-11 138.16 -7.2%

Jul-11 ? ?

Remember: Case-Shiller figures reported with 2-month lag. Why wait until September for what you can see today?

GOT LOCAL?

Timing Matters (…should you wish to buy low/sell high)

Four (4) selected San Jose zips: San Jose 95125 by Price Quartile:

Four (4) selected Phoenix cities: Scottsdale 85252 by Price Quartile::

Days-on-market by zip code, 5/27/11(Sample size: 7k zip codes)

PRICE REDUCTION HEAT MAP: WICHITA, KS

Did we mention location, location, location?

CASE EXAMPLE

Asset-level analysis: 1008 Pierce Street, West Sacramento, CA

1008 PIERCE ST., WEST SACRAMENTO, CA

(Please note the egregious product placement of our Listings IntelTM application)

“Comps” mean “Comp”etition

(… and here)

Listing History for 821Reuter Drive:

THE CATFISH RECOVERY MEANS…

• Volatility means profit with the right information

• Watch housing just like other asset classes (equities, interest rates, currencies, etc.).

• Take your gains, come up for air, then dive back in at each inflection point

THE CONSTANT GROWTH MYTH

Source: http://cafehayek.com/site/wp-content/uploads/2011/04/Case-Shiller-updated1.jpg

THE CATFISH RECOVERYOne more time… Remember it’s

THE ONCE-IN-A-LIFETIME OFFER

• Releasing our initial Mid-Cities Report in two weeks.– Send an email to: info@altosresearch.com

• Distressed Loan/Mortgage/RMBS:– Send us a portfolio of 25 loans or RMBS

security–We’ll run thru AltosEvaluate & Listings

IntelTM and share the results

ALTOS RESEARCH CAPITAL MARKETS

Scott SambucciVice President, Market Analyticsscott@altosresearch.com(415) 931 7942

Andrew GoeiManager, Market Analyticsandrew.goei@altosresearch.com

Jeff EckenhoffManager, Market AnalyticsJeff.eckenhoff@altosresearch.com

Ben GimpertDirector of Quantitative Analyticsben@altosresearch.com

Jon SterlingDirector of Marketingjon@altosresearch.com

Read more about our Housing Market insights at:

http://blog.altosresearch.com

Website: www.altosresearch.com

Appendix: Active Market Supply: CA, TX, FL, NC, AZ, GA

• Supply affects prices

• Inventory is generally higher vs. last year, but trending lower. (ST Positive for housing market)

• Similar trending across markets, but absolute levels are not always similar

• The Supply Problem, and the “Other” Supply Problem