4 Reasons Why The Lowest Average Combined Loan-to-Value (CLTV) Ratio on Record Benefits Real Estate Investment

A lot of people understand that real estate has increased in value, but until recently there wasn’t a statistic that perfectly illustrated how greatly real estate has gone up in value. In their December Mortgage Monitor Report, Black Knight, Inc announced their findings: that in 2021 the average combined loant-to-value ratio, or CLTV ratio, had hit record lows.

To quote the publication, “Rising equity stakes have pushed the average homeowner’s combined mortgage debt down to just 45.2% of their home’s value, the lowest average combined loan-to-value (CLTV) ratio on record.” (Black Knight’s October 2021 Mortgage Monitor is Now Available (blackknightinc.com)) It is essential to articulate the sheer gravity of this news, as well as how it can greatly impact real estate investors, both those investing in their private endeavors as well as those investing in NRIA’s real estate investment offerings.

One, the reason for this increase is due to the rising value of real estate. As Black Knight stated, the rising equity stakes have increased the value of real estates. The average person’s CLTV decreases over time as an individual pays off their loan further. However, the CLTV can also decrease as homes increase in value, due to any number of reasons, including home improvements, rising property value, or increasing demand for homes driving prices up.

If a home buyer purchased a home twenty years prior for $400,000, and the home is now appraised for $800,000, that means that their CLTV ratio, on top of twenty years of mortgage payments, decreases as the home’s value increases. “Skyrocketing home values over the past 18 months have increased the average mortgage holder’s equity stake by $53,000, for an average of just under $178,000 in available equity per homeowner.” (Black Knight’s October 2021 Mortgage Monitor is Now Available (blackknightinc.com)) Real estate investments, across the board, have appreciated in value.

Two, this ratio increases the tappable equity of those investing in real estate. “Tappable equity – the amount available for homeowners to access while retaining at least 20% equity in their homes – has risen by 32% over the past year, an increase of $2.3 trillion since Q3 2020.” (Black Knight’s October 2021 Mortgage Monitor is Now Available (blackknightinc.com))

All of this is due to the increasing value of homes, referenced earlier. “As prices have surged over the past 18 months, the average mortgage-holder’s equity stake has risen by $53,000. That works out to nearly $178,000 available in tappable equity to the average homeowner with a mortgage before hitting a maximum combined loan-to-value ratio of 80%. What’s more, in the third quarter, homeowners tapped into their equity at the highest rate in more than 14 years as cash-outs made up 54% of all refinances.” (Black Knight’s October 2021 Mortgage Monitor is Now Available (blackknightinc.com)) That means people are cashing out of their housing market investments, even as houses increase in value. They are profiting, but not at the expense of the housing market.

Three, this tappable equity increase is distinctly different than the one seen leading up to the Great Recession. Tappable equity increased leading up to the housing crash in 2008, but the situation here is drastically different. As the report assures us, “the $70 billion extracted from the market via cash-out refis in Q3 2021 represents just 0.8% of the available tappable equity at the start of the quarter. For context, that’s less than a third of the rate at which people were pulling cash out of their homes at the peak of such activity in 2005.” (Black Knight’s October 2021 Mortgage Monitor is Now Available (blackknightinc.com))

However, due to the many systems that manage and moderate the housing industry, especially underwriting practices, there is very little risk that the housing market will crash as it did in the Great Recession. One big sign? The average credit score is 50 points higher than the average person to receive a mortgage during the Great Recession, indicating that those who are given mortgages are far more reliable in regard to managing their finances.

Four, despite increasing home prices making homes less affordable, the housing market remains healthy. Undeniably, the rising home prices make it harder to afford to purchase a home, pushing many who might not be able to afford homes into a difficult situation. “Factoring in incomes as well as prices across the country, it now requires 22.4% of the median income to purchase the average-priced home with 20% down and a 30-year mortgage.” (Black Knight’s October 2021 Mortgage Monitor is Now Available (blackknightinc.com)) However, it’s important to remember that, with interest rates decreasing to all-time lows, dipping below 3% over the course of 2021, most of this money is being used to pay off mortgage rates, which, once again, contributes to the dropping CLTV ratio.

Despite homes becoming less affordable, the housing market continues to succeed. “A ratio higher than 20.5% in recent years has correlated with a slowdown in the rate of home price growth, but today’s inventory shortages continue to put upward pressure on prices.” (Black Knight’s October 2021 Mortgage Monitor is Now Available (blackknightinc.com)) What this indicates is that, despite homes being less affordable, more people continue to invest in the real estate market, either for their personal homes or in order to diversify their assets. Those that invest in real estate, either as a primary residence or as an investment opportunity, see their investment increase in value.

NRIA, thankfully, stands as a potential means through which someone can diversify their assets into real estate. NRIA develops multifamily homes in supply-constrained, high-demand locations. We build condominiums, townhomes, and apartments where people want to live. By investing in our real estate offerings, you can make a return on your real estate investments.

If you’d like to learn more about NRIA’s current investment strategies in the changing market, click here to download our newest eBook, How To Profit from the Housing Demand Tsunami.