Pro Teck Valuation Services' Home Value Forecast (HomeValueForecast.com) examines the impact of loan-to-value ratios (LTVs) on home prices over the past decade and explores how LTVs can be a barometer for market stability. In June's Home Value Forecast Update, the authors highlight Palmdale, Calif., which saw its prices decline by more than 60 percent from its 2006 peak and examine the 2000 to 2012 timeframe, when the LTV ratio for this entire period was approximately 94 percent. In addition, during the housing bubble, the use of second mortgages was more prevalent as part of the increased LTV.
"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," said Tom O'Grady, CEO of Pro Teck Valuation Services, 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 counter example is ZIP Code 91007 in Arcadia, Calif. The authors show its home price history back to 2000 and detail the remarkable performance during the post-bubble time period. In this case, the LTV average was well below 70 percent and the single family prices experienced a very shallow decline in 2008 and 2009 and now are at all-time high levels.
The authors have found that LTVs can be a useful barometer for understanding how home prices might perform in certain markets.
"For example, in our Home Value Forecast this month, we show a clear pattern of higher LTVs correlated with larger price declines and gain a better understanding of the effect of lower LTVs as part of neighborhood stabilization and increasing home prices," said O'Grady and Sklarz.
This month's Home Value Forecast update also includes a listing of the 10 best and 10 worst performing metros as ranked by its market condition ranking model. The rankings are run for the single family home markets in the top 200 CBSAs on a monthly basis to highlight the best and worst metros with regard to a number of leading real estate market indicators, including: sales/listing activity and prices, months of remaining inventory (MRI), days on market (DOM), sold-to-list price ratio and foreclosure and REO activity.
"Of particular note this month is that three of the top ten markets are in Texas and include the large Houston and Dallas metro areas," said Sklarz. "Two new entrants are Chicago and St. Louis, 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."
June's top CBSAs include:
►Austin-Round Rock-San Marcos, Texas
►Houston-Sugar Land-Baytown, Texas
►Salt Lake City, Utah
►Charlotte-Gastonia-Rock Hill, N.C.-S.C.
►St. Louis, Mo.-Ill.
►Tampa-St. Petersburg-Clearwater, Fla.
►North Port-Bradenton-Sarasota, Fla.
"A common theme among the bottom-ranked metros is that all are relatively small markets based on population size and sales activity," said Sklarz. "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."
The bottom CBSAs for June were:
►Beaumont-Port Arthur, Texas
►El Paso, Texas
►Shreveport-Bossier City, La.
►Little Rock-North Little Rock-Conway, Ark.