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?