Insights
June 16, 2022

CAPE Liquidity Score: First-Ever Predictive, AI-Powered Metric for Valuation, Loan Prepayment, and Default Risk

There has always been one undeniable truth about the real estate market: real estate properties are one of the most illiquid assets available. The liquidity of an individual property is observable by looking back at the number of days that a property was listed for sale before it was sold and the price at which it was ultimately sold. The idea of liquidity has been used as a proxy for the ability to sell a property without the need for discounting the price, but the speed and price at which a property is sold can vary wildly due to its dependence on macroeconomic conditions and hyper-specific conditions at the individual property level.

For the past couple of years, a combination of low-interest rates and skyrocketing appreciation have made for impressive returns and a rare number of mortgage defaults. However, as rates begin to rise and the environment begins to change, the ability to deploy more stringent risk measures will become more important than ever. Home purchases and refinances may start to reduce in number as fewer buyers qualify, HELOC origination should increase, and single-family rental (SFR) investors may no longer be able to count on the strength of every rental market.

To stay ahead, investors and originators operating in this new market will need a forward-looking metric backed by AI-powered property insights.

CAPE Liquidity Score, a first-of-its-kind predictive metric, provides investors in single-family real estate and mortgages with a direct way to assess the desirability of an individual property within its local market. CAPE Liquidity Score serves as a critical input into the proper understanding of a property’s valuation risk and a mortgage’s likelihood of prepayment, default, and loss.

 

Inside CAPE Liquidity Score

The idea of liquidity is not a new concept in the real estate market, but the ability to predict it is. CAPE Liquidity Score, part of the AIRE real estate intelligence platform, uses underlying AI-derived property attributes to predict liquidity—a prediction that was not previously possible without detailed, recent, and accurate property intelligence. Because it does not rely on recent sales transaction information, CAPE Liquidity Score can be applied to any property and is the first forward-looking liquidity measurement that predicts how quickly a property can be sold without the need for price discounting.

 

CAPE Liquidity Score

  • Functions as a single measure of property desirability
  • Machine learning model is trained on an industry-wide dataset 
  • Considers over 40 attributes that cover property location, condition, features, and neighborhood
  • Measures a property’s liquidity relative to its current geographic market—over the last six months in a specific zip code

Leveraging aerial imagery, AI-derived property characteristics, and machine learning, CAPE Liquidity Score functions as a single measure of property desirability and is easier to apply than attempting to use a patchwork of low-level attributes.

 

CAPE Liquidity Score Use Cases

Automated Valuation Models (AVMs)

CAPE Liquidity Score is predictive of overvaluation error and can be used by SFR investors, equity investors, owners of mortgages, and other AVM users to improve valuations and better understand risk. Based on our analysis of several hundred thousand properties, homes with lower Liquidity Scores on the MLS tend to be discounted in the final transaction, leading to AVM errors. In other words, AVM overestimation errors and price uncertainty increase as Liquidity Scores fall.

 

Mortgage Risk

Cash flow expectations for a loan are critical to its value. Prepayment reduces that revenue stream and creates large uncertainty in the value of the mortgage. CAPE Liquidity Score can improve projections of prepayments—properties with a higher Liquidity Score are more likely to prepay than those with a lower Liquidity Score. In addition, a Liquidity Score can be predictive of default—homes with a lower Liquidity Score are more likely to default. The score can be directly incorporated into existing cashflow models for loan valuation.

 

HELOC Origination

In the case of borrower default, HELOC originators are more vulnerable to losses than the primary mortgage holder, increasing the importance of liquidity’s impact on default. CAPE Liquidity Score is predictive of default—homes with a lower Liquidity Score are more likely to default than those with a higher score. Liquidity scores can be plugged into existing loan risk modeling workflows.

 

Interested in learning more about how Liquidity Score fits into our CAPE AIRE platform? Read more about AIRE, our AI intelligence platform for real estate here