A Close-Up View
Below we see a small range of both interest rates and capitalization rates on both graphics. The range of LTVs between the two graphics is also very small. You must squint very hard to see that the two planes barely touch in the right graph where LTV is 63%. One might say the market is "balanced on a point". That point is the precarious combination of the lowest LTV, interest rate and capitalization rate the market will tolerate under our zero XDCR or BTCF assumption.
Two lessons may be learned here. First, it only takes a minor reduction in LTV to eliminate all transactions; Second, transactions are critically dependent on the maintenance of low interest rates. Should interest rates rise transactions may only take place at higher capitalization rates (lower prices).
