In the wake of the subprime loan crisis, many real estate markets across the U.S. are suffering. In reaction to falling housing prices, some banks have chosen to lower their loan-to-value (LTV) ratios in deteriorating markets, while stronger markets enjoy higher ratios. This step could thin the already dwindling ranks of buyers in weaker markets, hasten depreciating housing prices and further the property crash in these struggling areas.
Markets across the country are declining, but some areas have been hit harder than others. Of the six most rapidly depreciating markets in the U.S., three are in Florida and two are in California, according to Zillow.com’s second quarter report. The sixth is in South Carolina. These areas, and others like them, will likely suffer the most because of the new lender regulations.
Three of the six most depreciating real estate markets in the U.S. are in Florida
“[Wells Fargo] has reduced the maximum amount it will finance by 10 percentage points in markets the company has identified as ‘distressed.’…It also cut by five points maximum financing in more than 125 other counties in a total of 22 states and the District of Columbia,” according to
The Wall Street Journal.
Earlier this month, SunTrust Banks, Inc. published a list of declining markets that included regions in 16 states; appraisers are to consult this list when evaluating properties for loans, according to The Wall Street Journal.
These distressed areas include parts of California, Florida, Michigan and Nevada, among others. In these regions, homebuyers could be required to pay at least 10 percent, and likely more, of the property price as a down payment. Buyers unable to afford a down payment of this size will effectively be removed from the market unless they use alternative financing options, such as FHA loans or seller financing.
However, these new restrictions do not apply in areas where the market remains stable or is improving, as is the case in the Pacific Northwest and some other regions. These areas largely maintain the less stringent lending standards that banks employed earlier in the housing boom, including 95 to 100 percent loan-to-value financing, according to The Wall Street Journal.
Investors looking to buy or sell should take the state of local property markets into account. Areas that are already in decline could potentially depreciate further as a result of these changes in loan policies. Sellers could face a greater shortage of offers as buyers find themselves unable to afford the financing available in the region. Investors having problems selling because of regional lender policies may, depending on their financial situations, want to consider offering seller financing or a lease option to attract buyers.
On the other hand, investors who are willing to pay higher down payments when purchasing might find bargains in these areas. With other buyers being edged out of the market by lower loan-to-value ratios, it may prove easier for such investors to step in and make reasonably priced purchases.
