Expiring Loan Limits Mean Weaker Housing Demand in the Fall

 

This increase in the cost of credit for such loans means weaker demand for homes in the affected price ranges, which will result in downward price pressure in many areas of the country, particularly high cost markets.

New research from NAHB examines the scope of impact on housing markets from the scheduled October 1, 2011 decrease in Government-Sponsored Enterprise and Federal Housing Administration loan limits.

These loan limits determine what types of mortgages may be securitized by the GSEs, Fannie Mae and Freddie Mac, or insured by FHA. Loans that fall outside of these limits would be subject to tighter credit conditions, including higher interest rates and larger downpayments.

As home sales are inter-related (for example, starter homes are sold to first-time homebuyers by move-up buyers), the pressure on prices could spill over on other homes in the affected areas.

Using reasonable assumptions concerning downpayments and Census data of housing values, the new analysis finds that the scheduled declines in GSE loan limits will affect 204 counties, containing 1.38 million owner-occupied homes (5 percent of homes in the U.S. [excluding territories]) in the affected price ranges.

Adding this number to the number of homes that are currently outside the temporary mortgage loan limits produces an estimated total of 5 million homes (7 percent of U.S. homes). These won’t be eligible for GSE-backed funding if they were put on the for-sale market. The 204 counties affected contain 27 percent of all homes in the nation. 

The effects for the scheduled declines in the FHA limits are more expansive. These declines will affect 620 counties, adding 3.87 million homes (11 percent of all  U.S. homes) to those outside the temporary loan limits. The 620 counties affected contain 59 percent of all homes in the United States.

There’s a potential to weaken housing demand for homes that in October would fall outside of the present-law loan limits. Spillover effects could be due to inter-related sales. Expiration of the present-law loan limits may be a negative factor weighing down housing in the Fall.

– Courtesy of NAHB