High credit scores and large down payments aren’t necessarily signs of a stable housing market.

Nationwide, average credit scores are the highest in California’s expensive coastal cities, according to the Urban Institute. In fact, the top four cities with the highest average FICO scores are here in California, including the San Francisco metro area, where households originating mortgages have the highest average score of 780. This top average score is followed closely by credit scores in:

  • Santa Clara;
  • Berkeley;
  • San Diego; and
  • Los Angeles.

On the other hand, regional average loan-to-value (LTV) ratios are inversely related to credit scores. In other words, a city like San Francisco where homebuyers and refinancers have high average credit scores also sees low LTV ratios. Here, the average LTV value at origination is between 70% and 75%. In San Diego, the average LTV at origination is between 80% and 85%.

In contrast, less expensive, inland metro areas see lower average credit scores and higher LTVs. In Riverside, the average credit score is roughly 730 and the average LTV at origination is between 85% and 90%.

The reason for this dynamic has to do with the types of mortgages households are taking out. With an average home value well over $1 million in San Francisco, jumbo mortgages are the norm, which by their nature require higher down payments and higher credit scores. Further, current homeowners who are seeking to refinance likely have relatively low LTVs since home values in the Bay Area have escalated rapidly in recent years.

Inland metro areas like Riverside have significantly lower average home values, many of which qualify for mortgages supported by low down payments like Federal Housing Administration (FHA)-insured and U.S. Department of Veterans Affairs (VA)-guaranteed mortgages, both of which accept lower credit scores and lower down payments than required by conventional financing.

Low LTVs aren’t necessarily a good thing

At first glance, housing markets with low LTVs may seem to be healthier and more stable markets. After all, lower LTVs are associated with lower instances of mortgage default and higher saving rates. But low LTVs are actually necessitated by tight, high-priced markets. As a result, fewer households are able to qualify to purchase in these areas with naturally low LTVs.

This is reflected in the low homeownership rates in California’s pricey coastal metros. For example, the homeownership rate in San Francisco (where the average LTV at origination is around 72%) is just 53% as of Q3 2020, while the homeownership in Riverside (where the average LTV is a higher 88%) is 68%, according to the U.S. Census Bureau.

This dynamic plays out across the state, with low-LTV metro areas experiencing significantly lower homeownership rates than high-LTV metro areas. For reference, California’s homeownership rate as a whole is consistently near the bottom compared to other states and well below the national average.

The major difference? An acute lack of residential construction has caused home values to soar in the expensive coastal metros of San Francisco, San Diego, Santa Clara and Los Angeles. Inland metros like Riverside and Sacramento have higher average LTVs and higher homeownership rates, the result of a healthier — though still somewhat constrained — level of construction over the past two decades.

To encourage higher rates of homeownership and more stability in the housing market, local legislators need to adjust zoning laws to allow for more density in desirable downtown areas. Likewise, barriers need to be lifted for builders going through the long permitting processes required to even start construction.

State legislators have made more construction a focus in recent years, but more work is needed to bring California up from its current low-inventory, low-homeownership state of being.