A Bad Day for Real Estate?

One of the ways the federal government tried to “rescue” housing was to raise the Conforming Loan Limits – which is the maximum loan that can be sold to FannieMae, FreddieMac and GinnieMae (FHA loans).

By raising loan limits, liquidity was provided to mortgage lenders enabling them to lend at competitive rates in most neighborhoods in America. That was a good thing.

Unfortunately, all good things come to an end. The government intervention had an expiration date-September 30, 2011. Today, we see the government trying to back off their propping up of the real estate industry. Reducing loan limits appears imminent. And THAT is a bad thing.

How Come?

Home Prices will fall. Jumbo loans (those in excess of the Conforming Loan Limit) are more expensive. Remember that home buyers buy on monthly COST. Higher rates on the “new jumbo” loans will force a correction (i.e. lowering) of home prices to offset the higher interest rates.  In my market, the loan limit for a single family home looks like it will be reduced from $729,750 to $625,500. Here are the repercussions: Home in the $650,000 to $750,000 will now come with higher interest rate mortgages ….maybe .5% higher. That hike in rates will require a 5% reduction in asking price for the home to have the same mortgage payment. So that $650,000 house will sell for $620,000. And homebuyers who were looking at $620,000 homes won’t want to pay $620,000 for what logically is a lesser home, so they will pay $595,000….and the downward spiral of home values will continue.

Higher rates will mean less people will qualify for loans. This is based on how much their income will support in a mortgage payment. Less qualified buyers for any product further reduces prices.

Keep your fingers crossed that rates stay low through this summer and fall because ANY rate increase will only multiply the problem. I think we need to try to pressure our elected officials to extend the current loan limits until the market is on more solid footing. As real estate professionals; as mortgage professionals; as Americans this is our duty.

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