Hat tip to DB for sending this along, from Reuters:
Bethany and Karl Schreiber are hunting for a nice big house in the pricey Washington, D.C., suburbs and they are facing a deadline: In just a few months their third child will be born, and the tiny two-bedroom they’ve been inhabiting will officially get too small.
But there’s a second deadline looming for them as well. Beginning on October 1, the government will dial back on the size of mortgages it guarantees in high-cost areas like San Francisco, New York and Washington.
After that, the maximum loan amount that Fannie Mae and Freddie Mac will back is scheduled to drop from $729,750 to $625,500. And that may make mortgages more expensive or harder to get for buyers like the Schreibers, who are shopping in the $700,000 range and would prefer to make a downpayment of 10 percent or less.
“If we wait a year, we may not be able to afford as big a house,” Bethany said in an interview. “Rates and housing prices are probably going to go up.”
The Schreibers concede their timing is mainly inspired by their own family circumstances. But others may be motivated to act now because of reduced government-backed loan assistance, housing experts say. Those programs were put in force as part of the stimulus package after the housing collapse.
“For people planning on exiting the market altogether (such as retirees), that is a compelling proposition,” says Stan Humphries, chief economist at Zillow. Home sellers may have to be patient to get the price they want. The curbs on government-backed loans could, at the margin, reduce the available pool of buyers, he said.
Anybody who wants a government-backed mortgage for a $1-million home after October 1 may have to come up with a $370,000 downpayment instead of $270,000, says Rob Chrisman, an independent mortgage banking consultant from San Rafael, California.
The deadline will mean most to upper-middle-class buyers and sellers in costly real estate markets where $1 million buys a nice house, but not a mansion.
To be sure, that part of the market is picking up. Real estate agents operating in tonier neighborhoods are reporting brisker business this spring than in recent years.
Sotheby’s, which specializes in luxury homes, reports sales making double-digit gains for the first quarter of this year over last year. The National Association of Realtors reported that the sale of homes over $1 million were up 5.1 percent in March over the same month last year.
“We are seeing a normal recovery,” said Jed Smith, managing director of quantitative research. “I’m sure somebody will accelerate their activity (because of the expected drop in government-backed loan limits), but I doubt you’ll see a lot of acceleration because of that.”
“That really isn’t on anybody’s radar,” agreed Linda Chaletzky, the Schreiber’s agent, and a specialist on Washington’s tonier suburbs. “But things are hopping.”
She said she is not worried about the loan clampdown,
“The mortgage industry will find a way around it, because they will have to. If they don’t, they will go out of business,” Chaletzky said. She expects private mortgage lenders to step in and fill that space when the government backs down.
BIG MORTGAGES
It was only in recent years that the loan limits went so high. Mortgages that are too big to be sold to Fannie and Freddie are termed jumbo loans and are backed privately. Until 2008, all home loans over $418,000 were considered jumbo loans. In that year, a stimulus-focused Congress twice raised the limit on loans the government would back in high cost areas, first to $625,500 permanently, and then to $729,750, temporarily.
Since then, Fannie and Freddie have backed an increasing share of that market. In 2010, so-called “jumbo conforming” loans, those over $417,000 and government-backed, made up 6.73 percent of loan originations, according to CoreLogic.
That top temporary limit was extended twice, but is expected to expire at the end of September.
When that happens, lenders who want to make loans over $625,500 will have to hold onto the mortgage themselves or find private investors to buy them. And while an active and hungry secondary market for these jumbo loans has yet to materialize in the post-crash world, there’s some evidence that lenders are preparing to move into that space and pick up any slack that the government leaves.
“There’s plenty of money out there,” said Steve Hopps, chairman of the California Mortgage Bankers Association.
Private lenders are preparing to step in, according to Guy Cecala of Inside Mortgage Finance, a research firm. In the last quarter of 2010, private lenders originated more loans over $417,000 (the traditional jumbo market) than did government agencies, he said.
The lower loan limits will leave about $10 billion more in loans for private lenders to handle, reckons Cecala, and he expects lenders to go after the market aggressively.
BIGGER DOWN PAYMENTS
Investors like the fact that jumbo loans tend to be safer and more profitable than smaller ones. The privately-backed mortgages require bigger downpayments (currently about 30 percent of the home’s value, instead of the 20 percent more typical in less expensive loans), which adds security.
Also adding to their allure, the loans carry higher interest payments; the spread between the so-called conforming loans backed by Freddie and Fannie and jumbo loans is running about 0.5 percentage points higher, said Cecala. Furthermore, a higher proportion of jumbo loans are made on a variable rate basis, which is less of burden for holders, Cecala said.
Going still higher in the homes market, there will be less impact from the shrinking jumbo. Many buyers of multi-million dollar homes do all-cash deals and are relying on cash more than ever before, according to Stan Smith, a real estate agent who works in Beverly Hills area.
The biggest impact might be limited to that space and those neighborhoods occupied by people like the Schreibers — folks who see themselves as middle class but in very expensive areas.
“I see borrowers, if they want that kind of loan, paying a little more,” says Chrisman. “But it’s not going to be a life changing event for a couple of orthopedic surgeons in Beverly Hills.”
(Reporting by Linda Stern; Editing by Richard Satran)
$729,750 – $625,500 = $104,250.
$104,250 x 0.50% = $311/mo additional cost.
If somebody is buying a million-dollar house and $311/month is a deal-killer, I’m not sure they’re in the right league.
Plus, expect that sellers will be very reluctant to reduce their price to compensate. Note that the tax-credit going away didn’t tank values, like many thought.
The next few months will be like last year’s tax credit though, buyers will pick up the pace just to have bragging rights.
I wonder how inflation will factor in that equation?
Jim,
I don’t follow where the $311 comes from. Aren’t we talking about a likely higher rate on the entire loan balance for non-GSE loans?
Seems to me this is a big deal. The past few years there has been a frenzy for any coastal properties priced inside the loan limit (high $800’s if you figure 20% down payment). I think this GSE drop will cut that frenzy zone to the 700’s — and cause some squishdown for houses above and below that range too.
I know cash buyers are still big in this market, but they’re not the whole market — and if they’re flippers, they’re going to sell to someone who needs a loan.
This seems a big enough deal that NAR will order its lackeys in Congress and the Administration to do something about it.
Thanks W.C. for the correction.
$729,750 at 5.0% = $3,917
$729,750 at 5.5% = $4,143
Difference = $226 per month.
Bragging rights are a big deal, sub-consciously.
I wonder how inflation will factor in that equation?
All this cheap money has yet to impact incomes … that’s the only inflation that the Fed is concerned with.
Jim,
Not sure what you are trying to argue here. Whatever the numbers are, it is clear that this change does not do anything about the number of people wanting to sell and move somewhere else for whatever reason, but it clearly impacts the amount potential buyers are able to offer. You can keep arguing that a few hundred bucks a month is nothing, but at the margin it is real money that has to come from somewhere. Ergo it is going to move the equilibrium if implemented.
You might see statistical evidence over time, but on the street I doubt that you’ll see sellers lowering their price because of loan limits.
I think it’ll cause buyers to hold out longer for a better deal, which could slow down sales, but as long as sellers can live for free there isn’t enough pressure on them.
The great buys will happen, fixers will struggle more, and hopefully we’ll get a couple of wildcards just to keep it interesting.
Jim,
For the activity you’re seeing in San Diego it shouldn’t make a difference — tight inventory and enough buyers that certainly aren’t stretching. As long as those two factors hold SD prices will, too.
For the broader market… I’d kindly disagree.
I believe in San Diego County the jumbo loan level is $697,500 not the higher limit from the article. I agree with WC V. that Congres will be lobbied to extend the higher lending limit. With the talk of soaking the rich, I’m not sure an extension will have traction. Another consideration is by August, we should be in 2012 election mode.
2 quick points-
Buyers set market price, NOT sellers. The story of being priced out due to tighter underwriting for mortgages or higher borrowing cost, is malarkey.
Real markets are not concerned with what’s going on on the sidelines, real markets are impacted by transactions … that includes distressed sales.
@tj
I can’t speak for San Diego like I can Orange County. However, we also have tight inventory and enough buyers that aren’t stretching, but we’re only selling about 2,500 homes a month (inc new homes). That’s about 1,000 less than our average. It sure the hell ain’t enough volume to sustain current pricing, which keeps declining. And this has been going on for a few years, and affordability is at healthy levels. Where the hell is the pent-up demand?
I’m so sick and tired of explaining this to sellers who either believe the market is about to blast-off (not gonna happen), or they are pissed at me because they think I’m not seeing the “value” in their home.
“For the broader market… I’d kindly disagree.”
JMO … don’t count on San Diego being any different in the long-run.
Donny,
Believe me, IMHO no place is immune.
I’m just north of you in LA and it’s only a matter of time before the Westside & beach areas get really hammered.
Where the hell is the pent-up demand?
To me there is no such thing.
i know people who raised 5 kids in a 2.5Bedroom Single Family House in the city.
3 boys in one bedrom, the Girl in the little room.
The oldest boy set up a cave in the basement.
1.5 bathrooms, meant they had to share.
I think there is now political will and good economic reasons to dial down the government sponsored incentives for real estate.
The conforming loan limit should be lowered because values have dropped.
What will happen? My guess is more informed Buyers will make their move this summer to finally purchase. The winter months will see a dramatic drop-off in sales until the following Spring when more fundamental economics drive home purchases.