Information provided by the Federal Housing Finance Agency (FHFA) indicates that the loan amount relative to the purchase price of the home, leverage or the loan-to-value (LTV) ratio, rose in 2016 to 79.2 percent, 140 basis points above the rate in 2015, 77.8 percent*/**. The increase over 2016 largely reflected growth in the LTV ratio on purchases of previously occupied homes as opposed to newly built homes. However, while the growth in the LTV ratio was smaller on newly built homes, the 2016 level exceeds the percentage reached in the years prior to the recession.
The LTV ratio is calculated at the time of purchase and covers home purchases using a mortgage. Previous NAHB analysis of Census Bureau data has found that the share of new home sales purchased with cash has hovered between 5 percent and 6 percent for the last two years. According to the National Association of Realtors, 27 percent of existing home sales were cash sales in February 2017.
As illustrated by the figure above, the LTV ratio on purchases of all homes increased from 77.8 percent in 2015 to 79.2 percent in 2016. The 140 basis point increase largely reflected the increase on purchases of previously occupied homes. Between 2015 and 2016, the LTV ratio on purchases of previously owned homes rose 170 basis points to 79.4 percent. Meanwhile, the LTV on newly built homes increased by 60 basis points to 78.5 percent. At the same time, sales of new single-family homes in 2016 accounted for approximately 10.4 percent of both new and existing single-family sales combined, while sales of existing single-family homes accounted for 89.6 percent of all single-family sales.
The increase in the LTV ratio on all purchases reflected an expansion in the proportion of purchases with a LTV ratio above 90 percent. As shown in figure above, the share of all purchases with an LTV ratio exceeding 90 percent climbed to 25 percent in 2016, from 20 percent in 2015. The increase in the share of purchases with an LTV ratio above 90 percent offset declines in the portion of purchases with an LTV at or below 80 percent.
The category of LTV ratios above 90 percent grew for both purchases of newly built homes and previously owned homes. However, the share increase of LTV ratios above 90 percent was greater for purchases of previously owned homes. In 2016, an estimated one-quarter of purchases of previously owned homes had an LTV ratio above 90 percent. Meanwhile, 23 percent of newly built homes had an LTV ratio exceeding 90 percent.
Although a larger increase in leverage on purchases of previously owned homes was recorded in 2016, the current level remains below the pre-recession peak ratio. In contrast, the current LTV ratio on newly built homes exceeds its boom-era level of 77.9 percent that was reached in 2003. However, the boom-era peak LTV ratio on purchases of newly built homes was less than the peak level on previously owned homes reached in 2007.
The figure above also shows that the run-up in leverage during the boom-era largely reflected trends in the LTV ratio on purchases of previously occupied homes. Between 2000 and 2003, the LTV ratio on previously occupied homes fell, a trend that had been in place since 1995. Between 2003 and 2006, the LTV ratio on purchases of previously owned homes rose to 79.9 percent.
Meanwhile, the LTV ratio on newly built homes ticked up slightly following the 2001 recession but mostly fell between 2003 and 2005. Even after accounting for the increases in 2005 and 2006, the LTV ratio on newly built homes remained below the levels in both 2000 and 2003. Leverage on purchases of both previously occupied and newly built homes fell over 2008 through 2010, the period of the Great Recession. Since 2010, the LTV ratio on both previously occupied and newly built homes have increased roughly in tandem.
Previous analysis demonstrated that tight mortgage credit standards reflect historically high credit scores and low debt-to-income levels on mortgage originations. However, LTV ratios on the upper margin have come back to their pre-recession levels. Several hypotheses have been put forward to explain the underlying reason for the rise in LTV ratios. On the one hand, households may find it more difficult to save for a down payment on a home. This barrier may rise as home prices appreciate. Another explanation is that the shortage of available homes, which may also be pushing home prices upward, is contributing to higher LTV ratios.
* To conduct this survey, FHFA asks a sample of mortgage lenders to report the terms and conditions on all single-family, fully amortized, purchase-money, nonfarm loans that they close during the last five business days of the month. The survey excludes FHA-insured and VA-guaranteed loans, multifamily loans, mobile home loans, and loans created by refinancing another mortgage.
** The first figure shows the averages over the 12 months of each year. This is because the annual data for 2016 has not been released yet. However, the average over the 12 months of 2015 is similar to the annual level for 2015.
2015: Annual v. 12-month average
All Purchases: 77.8%/77.8%
Newly Built: 78.0%/77.9%
Previously Occupied: 77.8%/77.7%