On October 1st of this year, new conforming loan limits went into effect in 250 counties across the United States. These 250 counties are “high cost” areas, such as Manhattan, where housing is considerably more expensive than in other counties around the country. While most counties have enjoyed conforming loan limits of $417,000 since 2006, the Economic Stimulus Act of 2008 created higher limits for these 250 high-priced counties – up to $729,750. These higher limits were always intended to be temporary but have been repeatedly extended. That is until this year, when the higher limits in the 250 high-priced counties were reduced, effective October 1st. As of now, the maximum loan size qualifying as a conforming mortgage is $625,500.
The now lower limits have caused quite the stir (even today, see here) among those who believe that the housing market will be significantly and negatively affected by this change. But will it really? Consider the following facts:
1. In a previous analysis, Zillow found that only 0.75% of all homes in the continental United States, or 2.5% of all homes in these 250 high cost counties (Zillow actually covers 154 of these counties that are within the continental United States), could be potentially affected by this. And The Wall Street Journal notes that “only 1.3% of all loans done by Fannie, Freddie and the Federal Housing Administration would be affected by the change.”
2. Across these affected counties, the loan limits declined 10.3% on average (from their level set in 2008), but the average decline in home values in these markets since January of 2008 has been 24.1%. This indicates that more homes are now eligible to be purchased in these counties with expanded conforming mortgages under the new lower limits, than would have been under the prior, higher limits in 2008.
3. Last but not least, consider the actual rates that home buyers are getting for buying properties that are above the new limits but below the old limits, meaning the newly minted jumbo loan applicants. The figure below shows the average rate applicants have been quoted in the Zillow Mortgage Marketplace for purchases on primary residences with a 30-year fixed mortgage and a down payment ranging from 15 to 25 percent. The yellow line, which shows the average rate quoted to consumer buying a house (minus the down payment) valued below the old limit but above the new limit – for which they used to be able to apply for an expanded conforming loan, but are now having to apply for a jumbo loan – started moving away from the red line, which is the expanded conforming rate average, in September as lenders prepared for the new limits to take effect in October. Now the yellow line tracks the blue line, which represents the average rate for jumbo loans. Currently, the spread between expanded conforming and jumbo loans is holding steady at around 60 basis points.
In conclusion, while some areas, such as Manhattan, might be harder hit than others by the lower conforming loan limits, the impact overall is limited by the fact that relatively few homes nationwide will be affected and affected borrowers will still have access to mortgage credit, just at somewhat higher rates. Since these lower limits are not an issue for the overall health of the real estate market, it becomes difficult to see the public policy benefits of subsidizing mortgage rates for mortgages as expensive as $729,750.