I think we’re going to see sales slow to a crawl for the rest of the year, due to sellers being unwilling to lower their price enough. Then the media will blame it on the loan limits going down.
Our friend Nick at the Wall Street Journal worked on this article for a couple of weeks about the loan limits going down in October, but no conclusive evidence yet as to what we can expect.
An excerpt:
In San Diego County, loan limits will decline to $546,250 from the current ceiling of $697,500. Greg Demgen and his wife are trying to sell their 5,200 square-foot home for $900,000. While he says he’s confident the home is priced to sell quickly, finding buyers who can qualify for cut-rate loans “can only help the cause,” says Mr. Demgen, 51, of Vista, Calif. “We should get it done before that $697,500 ceiling goes away.”
One in 12 home sales during the past year fell within the county’s proposed and current limit, assuming a 10% down payment, according to MDA DataQuick, a real-estate research firm.
Some lenders say they will soon ease lending rules at the margins for jumbo loans. Banks sharply tightened standards three years ago on jumbo mortgages. Wells Fargo is preparing to reduce down payment standards to 20% from 25% in more markets and to relax the amount of liquid assets that borrowers must have after closing the loan, said Brad Blackwell, national sales manager for Wells Fargo Home Mortgage.
Mr. Demgen’s real-estate agent, Jim Klinge, says the decline in loan limits is overdue for loans backed by the FHA, which allows minimum down payments of 3.5%. Borrowers need to earn nearly $140,000 to qualify for the largest FHA loan in the county. “With that income, if you only have $25,000 for a down payment, then you shouldn’t be buying a house with virtually no skin in the game,” he says.
Still, the overall effect of the decline in the limit is hard to gauge. “The impact is going to very regional and how it all adds up is going to be hard to tell,” says Guy Cecala, publisher of Inside Mortgage Finance. “Dollar-wise and percentage-wise it’s not a big change, but that’s easy for me to say. I’m not living in San Diego looking for a new house.”
“Assuming a 10% down payment”
Don’t most buyers in this range put down 20% or more? Isn’t PMI a burden at 10%? I think 20% is the relevant number.
I think the new limit plus the 20% down payment will be a significant barrier for a lot of buyers. Even if they can afford a slightly higher payment on a slightly larger jumbo, they’re going to want to negotiate to fall within conforming. That level will fall from about $860k to about $682k. I’ll bet you see lots of transactions around $680k in the future.
An interesting statistical study would be to look at historical loan limits and transaction prices. I’ll bet you see far more transactions at or just under the limit + 20% DP than just over that number.
These are my comments sent to Nick…..but not used for this article:
The changing loan limits will likely cause a stir over the next few months. Once the Fed wraps up the QE2, the bears will target the lower loan limits as the next reason the real estate market will dump – are we on the triple dip yet?
First let’s check how many sales in the range are being financed on low-down-payment programs:
YTD detached sales in San Diego County between $550,000 and $750,000: 1,139
Those financed FHA/VA: 186, or 16%
YTD detached sales in North SD County coastal between $550,000 and $750,000: 302
Those financed FHA/VA: 40, or 13%
We might just be lucky that there are so many affluent people here, but I think it is the change in mentality – these days, homeownership is for rich people.
Buying a home is risky, those who are low on dough will talk themselves out of it, rather than take a chance.
During the peak, these were the type of folks that bought with exotic financing, and got burned. It has taught us all a lesson, and if you don’t have ample funds that you can afford to lose, then renting is a very safe and comfortable option.
These same people might risk buying if prices were going up, but as we bounce along the bottom they perceive no rush.
When the loan limits go down, those in the affected range of $550,000 to $750,000 will have plenty of options for jumbo mortgages, they’ll just have to pay approximately 1/2% higher in rate. Rich people can live with that, and we’ve seen rates drop 1/2% since February, so I’m not sure how much they will even notice.
Is it tougher getting a jumbo loan? Contrary to what everyone else will tell you, I think it’s easier. The banks are so paranoid about having to buyback Fannie/Freddie loans right now that they are extremely strict with the underwriting guidelines – they could not be any more strict.
With jumbo loans they are keeping in-house (not selling), they might actually ease up a bit. I know that Mutual of Omaha Bank is much more relaxed about their own portfolio loans, rather than those they sell to Fannie/Freddie.
JTR – the unintended opportunity of this loan limit change will be for the private label Jumbo’s as you mentioned. Now they can justify a slightly higher rate which goes right to the bottom line.
Additionally, you should start to see more ‘junior’ loans coming back to bridge that gap.
Glad to see you got quoted JtR 😉
Under $550k properties should actually get juiced slightly because the buyers with tiny down payments who had been looking at more expensive houses just got bumped down. Now there will be more people competing in that lower range where you can still buy with just a few paychecks down.
Thanks James D.
Nick has been very careful not to make me look bad in other quotes, which I appreciate. But I thought for sure he’d include the “homeownership is for rich people” quote.
Instead, he used this, talking about Fannie/Freddie:
“We see these companies just hemorrhaging money, and it’s terrible,” says Matt Battiata, a real-estate agent in Carlsbad, Calif. But most Americans, he says, “don’t realize how valuable they are until they go to buy or sell a house.”
The full article:
http://blogs.wsj.com/developments/2011/07/06/rebound-or-retreat-after-mortgage-cap-declines/
The whole loan limits issue is in some sense a battle between cheap flyover country and the coasts. If the median house in Indianpolis is about 146k the change to 400 k there is a non event. This is a subsidy from flyover country to the coasts. Clearly on the coasts homeownership is for rich people only, you have to move back east for a median income to afford to own a home. (I live in the Tx hill country btw)
Lyle,
I forget who posted this before but it debunks the supposed subsidy for the coasts idea;
http://www.visualeconomics.com/united-states-federal-tax-dollars/
In California for every $1 we pay in federal taxes we get back $0.78. In Texas it’s $0.94, a little better, close to breaking even. In Indiana it’s $1.05, they are a charity for the coasts as are most red states.
Any idea what the new loan limits will be for L.A. county?
I believe the argument of net tax benefits from the Fed Gov is bunk. As an example we can assume that the massive federal agriculture subsidies drive the “flyover country taking” rate much higher. However, it’s the coasts that benefit from the subsidy by having lower food prices than if no subsidies existed. The coasts benefits more because of the sheer volume of people getting subsidized food.
This is but one example, of many in both directions, of how you need to take macro numbers, when attached to opinion, and think critically a few derivatives deeper than the surface of a nice looking cartoonish chart abouta complex subject.
I say cut the loan limits to an even amount coast to coast. If you voluntarily choose to live in an expensive area, more power to you, but it is a choice not a mandate like federal taxes which are equal in every jurisdiction.
@9 JimT: LA County goes down to $625,500, from ~$729k: http://www.calculatedriskblog.com/2011/07/conforming-loan-limit-data.html
Home ownership in places like coastal San Deigo County is for rich people. In 95% of the country (by land mass, not population), the middle class can fairly easily afford a house. That is, a house that sells for $750k in Jim’s territory will sell for maybe $150k in the vast majority of the country.