ThomasGoodwin.com

In yesterday’s online edition of The Cincinnati Enquirer there was a story about the various local real estate markets throughout the U.S. that are most susceptible to seeing their markets collapse. Cincinnati ranked # 8 in the nation for having the riskiest housing market according to Forbes magazine based on the extent to which most homeowners are leveraged (via the loan to value ratio).

The article points out that Cincinnati has not only a higher than average number of adjustable rate mortgages (ARMs) in use in its market but it also has the 5th highest mortgage loan to home value amount in the 40 largest metropolitan markets throughout the country. The combination of the greater use of ARMs and the more-leveraged homeowner could make it difficult for the area to regain any momentum in improving local sales of new and existing homes.

Although I see some validity in Forbes‘ study, there is more to consider than just how much people borrow to buy a home and how many of those people use ARMs to do so. In fact, a better indicator than ARMs might be a study that considers the number of people using Interest Only loans to buy properties. These are the individuals that stand to be squeezed the hardest as interest rates climb.

ARMs come in varying terms - say 3 year ARM, 5 year ARM, 7 year ARM, and so forth. Therefore you have the number of people facing an interest rate increase with ARMs spread out over several years. Also, there is a max. amount that an ARM can increase in any given year (usually 2% increase in the interest rate) as well as a max. increase for the life of the loan. If someone had taken out a 5 year ARM in 2002 that was due to increase this year, they would most likely face a 2% increase in interest rate.

Considering interest rates in 2002 were around the 40 year lows, these ARMs may have even been done at 4% or even less! So to think that the market is going to get destroyed by people losing their shirts when the interest rates on their loans is going up from 4% to 6%… well, let’s just say I’m not expecting to trade in my real estate license for an auctioneer’s license in the near future. Cincinnati is a pretty modest market, with the overall appreciation over the past few years more closely resembling an inflation factor of about 3%. We certainly didn’t see the run up in prices that some markets did, like Miami, FL that topped the Forbes list for the most risky market in the U.S.

I don’t have hard figures on this, but just knowing the culture of this city leads me to think the real estate market here is more stable. A lot of Cincinnatians, especially those on the west side, tend to stay in the city for long periods of time… many are even “lifers”. While this can make it difficult to come into town and adapt, it does create stability in the marketplace. Also, the city is not exactly tied to a volatile industry (i.e. high tech in Silicon Valley circa 2000 & 2001). This city is home to some staple consumer goods that some would even say are recession proof… Procter & Gamble comes to mind first thing, as does the grocery chain Krogers. There are also a lot of steady, conservative financial companies… like insurer’s Great American, Western Southern, Ohio Casualty, Cincinnati Financial, and Union Central. Fifth Third Bank is headquartered here and the Federal Reserve has an arm of the Cleveland branch in downtown as well. It would be interesting to see the proportion of people who are born here and also stay here after college or well into their careers (home buying years).

In case the link to the above Cincinnati Enquirer doesn’t work, I am attaching a copy of the article in Adobe PDF format that you can read in your Internet browser or download to your desktop. For more information on companies with headquarters or a strong presence in the Greater Cincinnati area, please visit CincinnatiUSA.org

As always, I welcome your comments and feedback…