Restoration of FHA High Cost Limit to Help Challenged Market Segment By: Sara Sutachan, senior research analyst and Oscar Wei, senior research analyst
As loan limits were reduced to lower levels on October 1st, October home sales in the affected price tiers softened in California. Overall, there were 493,240 sales of existing detached homes in October improving 0.9 percent on a month-to-month basis and up by 8.5 percent over last year. California home sales rose for the fourth consecutive month on a seasonally adjusted annualized basis. . The statewide median price, however, showed a larger than expected decline of 3.3 percent from September and a decrease of 8.9 percent from last October to $278,060.
Despite the overall gains in statewide sales, sales in the price segment between $500,000 to $999,999 (the price segment directly impacted by the reduction in loan limits) were down 16.4 percent on a month-to-month basis and down 12.7 percent on a year-over-year basis. While it remains to be seen how much of the sales decline in this price tier may be attributed to the rollback of loan limits, the drop was particularly large when compared to sales under $500,000, which only declined 6.1 percent on a month-to-month basis but increased 11.1 percent when compared to the same period a year ago.
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Fannie Mae, Freddie Mac, and the Federal Housing Administration (FHA) together account for 95 percent of all new mortgages in California in each of the last three years (C.A.R. Annual Housing Market Survey). They are a vital part of the housing market in California where household incomes are not much different from the country as a whole but home prices are considerably higher. The higher cost loan limit provided a much needed source of financing to the mid-priced segment of market in California, particularly to trade-up buyers who continue to face challenges to moving up due to loss of equity, lower values, and other factors. The reduction in the high cost limits had a negative impact on this already struggling segment of the market, which in turn hinders the supply of entry-level homes for first-time buyers to purchase, compromising the housing recovery.
Would-be home buyers seeking home loans above the conforming loan limit must qualify for jumbo loans, which have higher interest rates (jumbo rates are currently about 70 basis points higher than conventional 30-year fixed rate mortgages backed by Fannie or Freddie), require higher down payments, and are subject to tighter underwriting standards. The direct impact of lower loan limits is a higher monthly payment, which has an adverse effect on housing affordability for California home buyers.
In November, Congress voted to restore the higher FHA limits which will provide a financing alternative for an important segment of the market that must recover for the overall market to heal. The FHA temporary high-cost loan limits provides households with ownership opportunities that would otherwise be sorely missed. This is one small step to help housing recover, which in turn will help the economic recovery in the state and the nation.
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