Conforming Loan Limit Shrinks This Weekend — Will It Hurt the Already Beaten Down Market?

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On Saturday, federally guaranteed loans — the limits on which were increased during the financial upheaval of 2008 to as high as $729,750 in some parts of the country — will be capped at $625,500. Homebuyers looking to finance more than that amount will either have to plunk down larger down payments to stay within the limit or resort to jumbo loans, which carry higher interest rates.

This change to the “conforming loan limit” will certainly sting a number of homebuyers in the country’s pricier markets. But my analysis suggests that, nationally, the change is unlikely to rattle the fragile housing recovery.

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Before the housing bust, government-insured loans topped out at $417,000, a limit that still applies across most of the country. But in areas with high home values — 250 counties, in all — the government increased those limits to assuage increasingly risk-averse lenders (and keep credit flowing to the housing market).

Here at Zillow, we analyzed our database of 100 million homes, along with millions of loan requests submitted this past year through the Zillow Mortgage Marketplace, to understand how the new mortgage limits would impact homebuyers and sellers. Overall, our findings were encouraging.

First, fewer than 2% of mortgage applicants fall directly within the impact zone — that is, those seeking loans above the new limit but below the expiring limit. Second, just one in 133 homes across the country, if put up for sale, would now have to be financed through a jumbo loan because of the shift in mortgage limits.

This is not to suggest the change will be painless. Come next week, a couple who put down 20 percent on an $800,000 home in San Francisco will have to finance the remainder at an annual percentage rate of around 4.13 percent instead of 3.88 percent. At $3,195, their monthly payment will be $186 higher than it would have been, had their loan been backed by the government. Over the life of the loan, the difference amasses to nearly $67,000. I agree: Ouch.

Remember, though, real estate values have continued to erode since conforming loan limits were expanded using a formula based on 2007 median home prices. As values have come down, the purchasing power of these expanded loans essentially increased. Three years later, a reevaluation seems logical. Especially because a chief goal of enlarging federal loan guarantees was to encourage home ownership among middle-class— not wealthy— Americans.

To illustrate: home values this summer in Monterey County, Calif., were down 52 percent from 2007. But loan limits there will drop by 34 percent. Monroe County, Fla., has seen a 40 percent decline in its home values; its loan limit is shrinking by just 28 percent. In effect, homebuyers there can still purchase more house under the new, lower limits than they could have when loan sizes were first expanded.

That scenario holds true in most of the 250 impacted counties. Not all though. Loan sizes in a dozen counties, including much of greater Boston, parts of Virginia, and Boulder, Colo., are dropping further than local homes have depreciated. Nowhere is the disparity greater than in Manhattan, where peak loans are poised to drop more than $100,000, even though home values there have soared 27 percent over the past three years.

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Although the new loan limits do not take effect until Saturday, Zillow loan data show they are already a market reality. Banks began adjusting their rate sheets weeks ago, realizing that homebuyers seeking a mortgage late this summer would close after the Sept. 30 deadline. The impact — so far, at least — has been confined to rate increases, not to an inability to obtain financing at all. That is, consumers requesting loans above the new limit but below the expiring limit are still getting quoted mortgage rates from lenders, just at 25 basis points higher than they were previously. Being able to see the change already in effect in our marketplace gives me added confidence that this will not be a major change for the housing market to digest. In a market challenged on many fronts right now, it’s a relief that we don’t need to add this to the list.

When the government initially raised the conforming loan limits in the throes of the housing recession, the plan all along was that these higher limits would be only temporary. Five years into the housing recession, the Obama administration has acknowledged a need to scale back government involvement in the mortgage business in a slow, protracted fashion. Currently the government backs more than 90 percent of new home loans; so accomplishing this task will be neither simple nor quick. But shifting a greater portion of today’s most expensive home loans into the private sector is arguably a small and responsible step in that direction.

Dr. Stan Humphries is a real estate economist and real estate expert for Zillow. Stan is in charge of the data and analytics team at Zillow, which develops housing market data for most major metropolitan statistical areas in the U.S., and provides economic research for current real estate market conditions. He helped create the algorithms for the popular Zestimate home value and the Zillow Home Value Index (ZHVI).