The Illusion of Higher Loan Limits
October 30th, 2008
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- What Higher Conventional Loan Limits Might Mean
- Home Prices Stabilizing, Say New Reports
- Loan Limits Become Complex in 2009
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For all the talk about rising loan limits, the dull reality is that the limits may be out-of-touch for a growing number of borrowers.
To understand why just take a look at the latest data from Standard & Poors, the S&P/Case-Shiller Home Price Indices. Case-Shiller has followed 10 markets since 1988 and 20 major markets since 2001. The past year has been the worst on record with annual declines of 17.7% for the 10-city index and 16.6% for the 20-city index.
“Nine of the 20 regions have record annual declines,” says S&P. “Phoenix and Las Vegas are now returning -30.7% and -30.6% versus August 2007, respectively. Each of the California markets- Los Angeles, San Francisco, and San Diego — are down more than 25% from their values 12 months ago. Miami and Tampa, the two Florida markets, are down 28.1% and 18.1%, respectively.
“For the August/July period only 2 regions, Cleveland and Boston, had positive returns. Cleveland returned +1.1% and Boston returned +0.1%. Boston has had positive monthly returns for each of the past five months. Dallas and Denver’s streaks of 4+ straight positive returning months ended in August. San Francisco was the biggest decliner for the month returning -3.5%. This worsened from its July/June return of -1.8%. From August 2007 to August 2008, Dallas and Charlotte have the best relative performance. Dallas is down 2.7% over the year and Charlotte is down 2.8%.”
Here’s the problem. Lenders make loans on the basis of the appraised value or the sale price, whichever is less. For 2009 the FHA loan limit has been set at $625,000 for a single-family home in the lower 48 states.
The catch is that you can’t get a $625,000 mortgage if your home is worth less. Seen another way, if someone in Los Angeles had a home that was valued at $750,000 last year then it might now only be worth $562,500.
The fact that the single-family FHA loan limit will drop from $729,750 in 2008 to $625,000 next year is not going to matter to large numbers of property owners in areas where home values have fallen significantly. Many properties will have insufficient value to qualify for either loan limit.
The FHA loan limit was $362,790 in 2007 and the idea of higher loan limits is that more borrowers in expensive areas will want to use the program to finance and refinance homes — thus improving local sales and prices. However, the number of borrowers impacted by the latest loan limits will be less than originally projected — not because of a problem with the FHA program but because of the general economic decline which has impacted most local real estate markets since 2006.
The result will be less pressure to raise local home prices than might otherwise have been expected. Alas.
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October 30th, 2008 at 1:02 pm
Our FHA limits are lower for Arizona and will be marked down as well at the beginning of the year.
Given the dominance of FHA loans right now, any changes such as this one can affect the activity in the market. You have a very valid point that prices will have declined in line with the changes to the FHA loan limits. There is validity to this and it’s a great perspective! However, in the Phoenix area where most of the activity takes place at the $400,000 or less threshold, this could put more pressure on sellers to lower their prices to slip under the threshold and make their home available to FHA borrowers (these are likely over 50% of the loans right now in Phoenix).
October 31st, 2008 at 3:42 pm
In Los Angeles, where prices still are far to inflated relative to historical rents and incomes, hoping for something to make home prices to rise is not helpful.