As astute market observers may recall, back in March (pre-complete-government-takeover) the conforming loan limit for Fannie Mae and Freddie Mac-backed loans was bumped from $417,000 to $567,500 for the Seattle area (King, Pierce, and Snohomish counties). At that time, the local press was touting the new limits at “a big dose of first aid” and the “shot in the arm” for the housing market, while here at Seattle Bubble we asked the question: Will Higher Government Loan Limits Boost Seattle’s Market?
Our conclusion was that the added lending restrictions attached to the “Temporary Jumbo Conforming” loans set the bar sufficiently high as to prevent the higher limits from having the (apparently intended) effect of preventing home prices from falling further. Given that the median price of homes in the Seattle area have fallen 6-8% in the intervening seven months, it would appear that this assessment was accurate. Of course, one could argue that perhaps without the higher conforming limit, prices would have dropped 10% or more in the same time, and there’s really no way to know whether that might be true.
If we assume that the Seattle area’s $567,500 temporary conforming limit did in fact somehow soften the blow, however slightly, then the latest news that this limit is being dropped to $506,000 is likely to be unwelcome. However, it should be noted that as far as I am aware, all the same restrictions are still in place including, but not limited to:
- Fixed-rate loans are limited to 90% LTV/CLTV (loan to value/combined loan to value).
- Minimum FICO for any loan is 660.
- Minimum FICO for LTVs greater than 80% is 700.
- No late mortgage payments in the preceding 12 months.
- Full doc only.
While the $567,500 temporary limit was based on a calculation of 125% of the median home price (source), the new $506,000 limit is “set equal to 115 percent of local median house prices” (source). So the new loan limit translates to a drop in government-calculated median home price from $454,000 around March to $440,000 around October.
Interestingly, although the King County SFH median price was $440,000 in May, the Snohomish County SFH median has never breached $400,000, and Pierce County topped out below $300,000. This is explained in the announcement pdf:
In calculating loan limits, FHFA used median house price estimates calculated by the Federal Housing Administration (FHA) of the Department of Housing and Urban Development (HUD). Those values have been estimated in a manner consistent with requirements of the National Housing Act, which requires that median prices for all counties in metropolitan statistical areas (MSAs) be set equal to the median price for the highest-cost county.
So will the new, lower limit put even more of a damper on Seattle area home sales? Or was the effect of the higher limit so negligible that the reduction won’t really matter?
David Losh » Nov 10, 2008 at 5:35 pm
Now what?
I’m still reeling from when you and the lending community were recommending putting 20% down on a property to make a lender feel extra special when they did the borrower the supreme favor of doing business and getting paid.
We gave those lender now billions upon billions of our tax dollars to lend, which they are reluctant to do. FHA is supposed to help the little guy and yet they stepped in to refinance seconds, helocs, and lines of credit on over priced refis.
Now that everybody is whole again you’re surprised about what?
It makes no sense.
Those FHA loans are rich people business. Read the requirements again. Those increased loan limits were to get more high end, middle class borrowers into the mortgage loan security bundles. It was another way to help FHA sell off more loans to generate cash flow and appear solvent, in my opinion.
Slumlord » Nov 10, 2008 at 5:51 pm
I expect the effect to be negligible. When the limit was raised, it was after a large number of variables were pointing downward. If anything, the increase in loan limits may have delayed the drop prices a little, and the corresponding decrease in limits may accelerate the decline somewhat, but I don’t think it really matters in the big picture of prices. If anybody notices, it will be the small number of people who have deals in process that be affected.
There is one financing issue that I think will matter more than just about anything else to our local house prices: the ability of airlines to finance new planes. This will have a direct effect on local employment, hence, my assumption that it will impact house prices.
Reinforcing my concern is a current article in Aviation Week that starts out with, “A severe shortage in aircraft delivery financing is threatening to leave Airbus and Boeing stranded with perhaps 200 “white-tail” aircraft they can’t place with customers”.
http://www.aviationweek.com/aw/generic/story.jsp?id=news/aw111008p3.xml&headline=Financing%20Crisis%20Could%20Saddle%20Airbus,%20Boeing%20with%20‘White%20Tails’&channel=awst
Scotsman » Nov 10, 2008 at 7:22 pm
Reduced loan limits would only have an effect if homes were selling.
magnolia44 » Nov 10, 2008 at 10:46 pm
looks like primary residence homes will have another weapon helping keep people in their homes. On NBC nightly news tonight they showed a home owner who was doing fine with her house and payments until she lost her job. This is someone who was doing just fine could afford the loan but due to circumstances she was going to lose her house. The bank modified her loan, gave her a 3% rate for the next 5 years and spread the term over 40 years. Her payment went from $3k to $1700 a month and now she and family are doing much better.
I got a feeling this is just the begining of such programs that will be launched, yes the spec properties will be on the market as keys are mailed in but actions will be taken for people who are going to suffer during this crisis. I think there is plenty stacked againstthe 40 – 50% off crowd, if we see that we are really talking depression and it aint going to happen. The govt and lenders are going to do all they can and if it fails…. we all will be up sh#t creek
As far as the loan limits, does it really matter anymore? Its been proven the increase didnt move nay property, its a non issue. The only people buying homes will be those with large down payments.
LUC » Nov 11, 2008 at 12:09 am
magnolia44,
That’s only part of the story. She lost her job and her husband’s construction business is slow. How long will she be able to keep up with payments with no job? Loan modifications don’t mean a “hill of beans” if you’re not working.
magnolia44 » Nov 11, 2008 at 7:18 am
LUC,
how about “Loans in general dont mean a hill of beans if youre not working”.
No one will be buying or owning if the economy collapses, the collapse crowd better be careful what they wish for. Its getting very ugly out there.
Mike2 » Nov 11, 2008 at 7:20 am
Any bets on whether loan modifications are going to apply to people buying now and in the near future. I’m thinking yes, eventually they will.
If you’re about to lose your job, buy a house. Then when you sign up for unemployment, get your loan modified.
LUC » Nov 11, 2008 at 9:16 am
magnolia44,
Loan modifications are not the solution, you are just kicking the can 1 -2 years down the road.
Joel » Nov 11, 2008 at 10:20 am
If the government fails to prop up housing prices then the world is going to end. Hah.
Magnolia44 » Nov 11, 2008 at 10:27 am
No one said the world will end. Let’s watch and see there will be more anouncements today from fre and fnm. Bottom line is if we see continued declines it will be over economically and it won’t matter for any of us. Maybe its too late but the govt is going to throw the kitchen sink at this.
Magnolia44 » Nov 11, 2008 at 10:32 am
My comments above are more for the national level. Sure we can see another 15 20% off here in seattle I just think something for the sake of the economy needs to be done on a national level.
LUC » Nov 11, 2008 at 10:43 am
Magnolia44,
“Bottom line is if we see continued declines it will be over economically and it won’t matter for any of us.”
I think the issue is more complicated than that…keeping people in houses when they are unemployed or under-employed will not save the economy.
mikal » Nov 11, 2008 at 11:00 am
What Magnolia is implying is that many of the people here that are cheering the disintigration of the US economy will find themselves also unemplyed and still unable to buy when prices will be low. This will receive a response from three or so people that will have the money saved, but the rest of you won’t and you will hungry or on food stamps. Software engineer, you make sense when talking about rebuilding our industrial base. You sould like someone who needs to be medicated when you talk about getting rid of our so called over population. What do you suggest, gas chambers?
The Tim » Nov 11, 2008 at 11:01 am
Magnolia44,
Your comments make it sound like if we have a depression (which seems at least 50% likely at this point), every single person will be unemployed and broke, and the entire nation will be chaos and rioting in the streets or something.
Granted, a depression would be no cakewalk, but I really don’t think it would be the end of the world scenario you seem to be painting it as…
Magnolia44 » Nov 11, 2008 at 11:28 am
Tim
I hope that’s the case I am under 30 and was in college when the dot com blew up so I didn’t pay attention to how things worked. I grew up with not a whole lot maybe our family of 6 saw 40k a few of those years but not many it was very hard.
Now me and my older brother find ourselves well surpassed that lifesytle incomes around 4-5 times that and in some ways we still can’t escape that mentality. Its actually pretty similiar to anyone who went through tough times and is in a better situation. So if that’s not going to be the scenario then I will be happy I am just preparing like anything can happen because that’s the mess this world is in. For now we are doing fine but the collapse of the economy has me worried no doubt about it.
Lake Hills Renter » Nov 11, 2008 at 12:02 pm
So apparently it’s now to government’s job to help people stay in their homes when they lose their job? What about keep their cars? Afford their day care? Pay their cable bill? If that’s the new government philosophy, where’s my welfare? If I get laid off, I should expect the government to come to my rescue too, regardless of whether I own a home or not, otherwise there’s a moral hazard and possibly even government-sponsored classism. Seems like discrimination to me to only help one group of people.
LUC » Nov 11, 2008 at 12:59 pm
Thank you LHR! I sold my condo when I was laid off from Amgen last year to save money.
Ask the Industry Insiders: Dan Klusman of RightTimetoBuy.org | Seattle Bubble — News & discussion about real estate & the housing bubble in the Seattle area. » Nov 14, 2008 at 5:41 pm
[...] and the required down payment is about to go up from 3% to 10%. [Editor's note: it is actually the conforming loan limit through Fannie and Freddie that has been lowered to $506,000, not FHA loans.] For many people that makes it a good time to buy. May not be the right time for [...]