By: Esther Cho
Mortgages with higher loan-to-value (LTV) ratios are not only riskier in terms of the likelihood to default, but they can also impact markets by triggering greater losses in home values, according to the most recent Home Value Forecast report from Pro Teck Valuation Services and Collateral Analytics.
“During the housing bubble (2004-2006), it has been well documented that higher loan-to-value (LTV) ratios led to riskier mortgages, but there has been much less research showing the correlation between high LTVs leading to greater price declines,” wrote Tom O’Grady, CEO of Pro Teck, and Michael Sklarz, president of Collateral Analytics.
“We have found that as home prices decline, homeowners with high LTVs are much less inclined to stay in their homes since they have little or no equity to protect. This leads to more price declines, which has a cascading effect on other high LTV owners and a further depreciation in home values,” the authors explained.
To illustrate their findings, the authors used Palmdale, California, as an example, where the LTV ratio was about 94 percent from 2000 to 2012. From the area’s 2006 peak to 2012, prices declined by more than 60 percent. During the crisis, second mortgages were also more commonly used, leading to an even greater increase in LTVs, according to the report.
During the same period in Arcadia, California, the average LTV stayed well-below 70 percent, and home values also experienced much smaller declines during the bubble period and now stand at all-time highs.
The report also included a ranking of the top 10 best and 10 worst performing metros out of 200 Core Based Statistical Areas (CBSAs). The areas are measured based on factors related to sales/listing activity and prices, months of remaining inventory (MRI), days on market (DOM), sold-to-list price ratio, and foreclosure and REO activity.
Among the best performers for the June report, the top three were Texas towns.
Sklarz also noted Chicago and St. Louis were added as new entrants, “which suggest the sharp recovery in the coastal U.S. markets of the past nine months is now beginning to reach some of the important interior U.S. markets.”
For the worst performing metros, many were smaller markets.
“We know that one of the catalysts behind the current real estate market recovery has been large investment funds purchasing distressed single family homes to rent out. As they have been focusing on larger and more visible metros, the smaller markets, such as the ones in the Bottom 10 list have been overlooked,” Sklarz commented.
Top 10 CBSAs
1. Austin-Round Rock-San Marcos, Texas
2. Houston-Sugar Land-Baytown, Texas
3. Dallas-Plano-Irving, Texas
4. Salt Lake City, Utah
5. Nashville-Davidson-Murfreesboro-Franklin, Tennessee
6. Charlotte-Gastonia-Rock Hill, North Carolina-South Carolina
7. St. Louis, Missouri-Illinois
8. Tampa-St. Petersburg-Clearwater, Florida
9. Chicago-Joliet-Naperville, Illinois
10. North Port-Bradenton-Sarasota, Florida
Bottom 10 CBSAs
1. Huntsville, Alabama
2. Beaumont-Port Arthur, Texas
3. Montgomery, Alabama
4. El Paso, Texas
5. Shreveport-Bossier City, Louisiana
6. Charlottesville, Virginia
7. Little Rock-North Little Rock-Conway, Arkansas
8. Spokane, Washington
9. Jacksonville, North Carolina
10. Peoria, Illinois