Higher loan-to-value ratios may suggest a property is well valued, but more often than not, steep LTVs precede sharp declines in home prices, Pro Teck Valuation Services claims.
The company made this assumption in its latest Home Value Forecast.
The valuation firm says local housing markets with higher LTVs during the 2004 through 2006 housing bubble ended up facing steeper price drops when compared to neighborhoods where homeowners maintained lower LTVs during the bubble.
The rapid price declines generally kick in after market shocks send homeowners with less equity searching for some sort of exit.
"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," said Tom O'Grady, CEO of Pro Teck Valuation Services, and Michael Sklarz, president of Collateral Analytics. "This leads to more price declines, which has a cascading effect on other high LTV owners and a further depreciation in home values."
Take for example, Arcadia, Calif., where the average LTV during the bubble was well below 70%.
When home prices fumbled nationwide, Arcadia experienced only a shallow price dip in 2008 and 2009. Pro Teck used Arcadia to illustrate the stabilizing effect of more modest LTVs within a real estate market.
Comparatively, Palmdale, Calif., saw home prices decline more than 60% from their 2006 peak after the market crash.
Coincidentally, the city’s average LTV ratio during the bubble hovered around 94%, falling in line with Pro Teck's estimation that higher LTVs set the stage for sharper price depreciation later on.