Oct 1 – Another Bad Day for Real Estate
One of the ways the federal government tried to “rescue” housing was to raise the Conforming Loan Limits – which is the maximum loan that can be sold to FannieMae, FreddieMac and GinnieMae (for FHA loans).
By raising loan limits, liquidity was provided to mortgage lenders enabling them to lend at competitive rates in most neighborhoods in America. That was a good thing.
Unfortunately, all good things come to an end. The government intervention had an expiration date—September 30, 2011. Today, we see the government trying to back off their propping up of the real estate industry. Reducing loan limits appears imminent. And THAT is a bad thing.
Why?
1.) Home Prices will fall. Jumbo loans (those in excess of the Conforming Loan Limit) are more expensive. Remember that home buyers buy on monthly COST. Higher rates on the “new jumbo” loans will force a correction (i.e. lowering) of home prices to offset the higher interest rates. In my market, the loan limit for a single family home looks like it will be reduced from $729,750 to $625,500. Here are the repercussions: Home in the $650,000 to $750,000 will now come with higher interest rate mortgages ….maybe .5% higher. That hike in rates will require a 5% reduction in asking price for the home to have the same mortgage payment. So that $650,000 house will sell for $620,000. And homebuyers who were looking at $620,000 homes won’t want to pay $620,000 for what logically is a lesser home, so they will pay $595,000….and the downward spiral of home values will continue.
2.) Higher rates will mean less people will qualify for loans. This is based on how much their income will support in a mortgage payment. Less qualified buyers for any product further reduces prices.
Cross your fingers that rates stay low through this summer and fall because ANY rate increase will only multiply the problem. I think we need to try to pressure our elected officials to extend the current loan limits until the market is on more solid footing. As real estate professionals; as mortgage professionals; as Americans this is our duty.
For more on Conforming Loan Limits including a map of the regions that will be impacted, click here. – The KCM Crew
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Dean,
We are not 100% convinced this will happen as Congress could step in on this…correct..and with Bernanke speaking yesterday….well, all things considered….
Dean- I think this is a great warning to consumers. It should also be a wake up call to Realtors to find alternative funding. A good professional are always on the lookout for good options that fix problems in Federal limitations. In the Seattle area, We have a great regional bank that charges no premium or jumbo rate increase for any loan amount up to 1.4 Million.
It is those inside our industry that refuse to look for solutions that hurt their clients the most.
Keep publishing love your stuff!
It doesn’t sound like it is a sure thing yet. I am an optimist. If it does go this way, I will just keep doing the best job I can! Thanks so much for keeping us informed. I had to read this one twice!