Pending conforming loan limit decrease will make California houses more affordable

The California Association of realtors acknowledges that a lower conforming loan limit will further damage our already weakened housing market.

Irvine Home Address … 51 CEDARLAKE #84 Irvine, CA 92614

Resale Home Price …… $695,000

We're not scared to lose it all

Security throw through the wall

Future dreams we have to realize

A thousand sceptic hands

Won't keep us from the things we plan

Unless we're clinging to the things we prize

Howard Jones — Things Can Only Get Better

Are falling house prices good or bad? I suppose it depends on who you ask. According to homeowners and realtors, falling house prices are the end of the world (see below). For those who want to buy a house, falling house prices means things can only get better.

House prices are currently falling, and they are expected to do so for the foreseeable future. Despite the whining by realtors that lending standards are too tight, these standards will continue to tighten as the market is weaned off government supports.

In 2008, the conforming limit was raised from $417,000 to $729,750 in high priced markets like Irvine. Apparently, bureaucrats felt high wage earners needed government subsidies to afford the ridiculously priced housing in places like Irvine. The real motivation was to prop up prices and shift the losses from private lenders to the government-backed GSEs. To some degree, they were successful.

I have made the case on two separate occasions that lowering the conforming limit will lower house prices in Irvine, particularly on those properties that required conforming loans in the $625,000 to $729,750 range. This argument has been dismissed by some in the astute observations.

In February, I reported that Lowering GSE and FHA loan limits will lower house prices.

However, if they do lower the jumbo conforming limit from $729,750 to $417,000 or below, the meat of the Irvine market would suddenly have to pay jumbo rates. We would be among the first markets in the country to experience the transition from public to private financing. Jumbo rates are somewhere between half-a-point and one point higher than conforming rates. If future buyers are facing higher interest rates, their hopefully higher incomes will not be leveraged as much, and the loan balance will not be larger.

Markets where jumbo conforming loans ($417,000 to $729,750) are prevalent, the market impact will be the most noticeable. If you combine that with the possibility that loans that large will no longer be tax deductible, and borrowing huge sums to take a position in real estate doesn't seem quite so appealing. Future take-out buyers will not be so leveraged.

I followed up with the post Conforming mortgage limit falls to $625,500 October 1, prices to follow.

This change strikes at the heart of the Irvine single-family detached market. Many Irvine properties have loans between $729,750 and $625,500. Every buyer contemplating a loan in that range will face an interest rate half a percent higher. As a result, buyers will either need to come up with 10% more income to afford the same mortgage, or the loan they will qualify for will be 10% smaller. Since most Irvine borrowers are maxed out, loan balances in this price range will likely decline by 10%, and the houses they were intended to finance will similarly drop in price.

Market prices are set on the margins, and if the current balance of supply and demand is not sustaining prices, what happens when demand is curtailed even a little bit? Obviously, the market will find a new equilibrium, most likely at a lower price.

For those that dismiss this upcoming drop in the conforming limit as meaningless, why has the California Association of realtors raised the alarms and come out opposing this change? i think we all know the answer to that one.

Pending conforming loan limit decrease puts California on edge

by JON PRIOR — Thursday, June 23rd, 2011, 1:04 pm

With the conforming loan limits expected to drop in October, the California Association of Realtors warned of the impending harm to homeowners, while the only private-label securitizer left notified investors of more opportunities.

Have you ever noticed that realtors only defend the interests of homeowners? Aren't buyers half of their income and market? Why do realtors consistently want to screw buyers in favor of sellers?

The conforming loan limit determines the maximum mortgage amount the Federal Housing Administration, Fannie Mae and Freddie Mac can buy or guarantee. Without congressional action, the limit will drop to $625,500 from $729,950 for the majority of counties nationwide on Oct. 1.

These three agencies currently fund 95% of the mortgage market, and housing finance reformers point to lowering this limit as a first step to usher in private capital.

The lowering of the conforming limit back to $417,000 is the first step toward returning to a private market. Private loans without government backing will have risk, and providers of the capital for these loans will want to be compensated appropriately for the risk they are taking on. This will increase borrowing costs and thereby reduce loan balances which will in turn lower prices.

However, according to CAR, more than 30,000 Californian homeowners will face higher down payments, higher mortgage rates and stricter loan qualification requirements when the limits drop.

Notice the choice of words above. It isn't California homeowners who will face those problems, it is California home buyers. This will hurt current homeowners trying to get their inflated prices, so CAr has conflated homebuyers with homeowners and chosen sides to favor owners over buyers.

Further, CAr is acknowledging that the new lower conforming limit will dampen demand. Of course, they portray that as a bad thing because it doesn't benefit homeowners. However, it's great for homebuyers, and I think it's fantastic.

The $104,450 decrease in most counties will not be felt in some California counties. In fact, it will be steeper.

CAR analyzed the effect of dropping the limit across several specific counties in California. In Monterey County, for instance, the government-sponsored enterprise limit will drop a total of $246,750, followed by a $151,250 drop in San Diego, and $141,550 in Sonoma County.

The FHA conforming loan limit will fall $201,450 in Merced County and $164,650 in Riverside.

“By reducing the conforming loan limit, thousands of California homebuyers will be shut out of homeownership,” CAR President Beth Peerce said.

Bullshit. It really annoys me when I read that nonsense. Nobody will be shut out of ownership. Sellers will have to lower their prices in order to sell. Period. If sellers chose not to lower prices, they won't sell. Since so much of the market is must-sell distressed inventory, sellers will lower their prices, and properties will become more affordable.

“The higher mortgage loan limits are critical to providing liquidity in today’s housing market and are essential to our housing recovery.

More bullshit. A higher conforming limit is essential for prices to stabilize at higher levels, but no government guarantees are required to stabilize pricing or for housing to recover.

We urge Congress to maintain the current limits and make them permanent to provide homeowners and homebuyers with affordable financing and help stabilize local housing markets.”

She forgot to add the words “at inflated price levels” to the end of her statement.

Redwood Trust, a real estate investment trust based in California and the only firm to issue a residential mortgage-backed security since the financial collapse in 2008, said the conforming loan limit decrease could drop more loans into its grasp. Redwood already plans to issue two more RMBS by the end of the year.

If risk is properly priced, and if the buyer pool meets the qualification standards, the private market will pick up the slack. It will just do it at a lower price point. The return of the private market is what we want.

If annual residential mortgage originations return to $1.5 trillion and jumbo loans — which served as the collateral in its RMBS deals — account for 20% of that, originations of jumbo loans could reach $300 billion, Redwood said in its first quarter report to investors.

“With GSE reform, the portion of the mortgage market that could potentially be available to Redwood could be substantially larger if the conforming loan limits are reduced (as the Obama administration has indicated it intended to do) during the reform transition period, and perhaps still larger if, as part of GSE reform, the concept of conforming limits is eliminated,” Redwood said.

Write to Jon Prior.

Follow him on Twitter @JonAPrior.

There is no question in my mind that a lower conforming limit will lower prices on desirable single-family detached homes in Irvine. It's only a matter of how much and how soon the impact is felt. With the other market headwinds, during the fourth quarter of 2011 when the new standards will be in effect could be pretty ugly.

Did the former owners buy this at auction as a flip?

This property was emailed to me by a reader who thought the transaction appeared a bit fishy. The property was originally purchased by a realtor and another party on 4/27/2004 for $715,000. They used a $515,000 first mortgage and a $200,000 down payment. They refinanced up to a $600,000 mortgage, but that still left $115,000 of their own money in the property, which they lost.

Perhaps with the lowered income everyone in real estate has been dealing with, the payments became burdensome. The property was allowed to go into foreclosure.

Foreclosure Record

Recording Date: 02/02/2011

Document Type: Notice of Sale

Foreclosure Record

Recording Date: 11/01/2010

Document Type: Notice of Default

The property was purchased at auction for $570,000 by SD Growth Fund LLC. In a strange coincidence, the initials of the last names of the former owners are S and D. Another reader (an attorney) looked into this coincidence, and there is no connection to the former owners.

The SD Growth Fund LLC is expecting a healthy profit from this property. With 20% down, the mortgage wouldn't be in the new jumbo range, but if it doesn't sell by October 1 when the new lower limits kick in, I suspect they will face some competition from nicer properties looking for those few buyers that remain.

Irvine House Address … 51 CEDARLAKE #84 Irvine, CA 92614

Resale House Price …… $695,000

House Purchase Price … $570,000

House Purchase Date …. 4/25/2011

Net Gain (Loss) ………. $83,300

Percent Change ………. 14.6%

Annual Appreciation … 125.1%

Cost of House Ownership

————————————————-

$695,000 ………. Asking Price

$139,000 ………. 20% Down Conventional

4.49% …………… Mortgage Interest Rate

$556,000 ………. 30-Year Mortgage

$120,594 ………. Income Requirement

$2,814 ………. Monthly Mortgage Payment

$602 ………. Property Tax (@1.04%)

$0 ………. Special Taxes and Levies (Mello Roos)

$145 ………. Homeowners Insurance (@ 0.25%)

$0 ………. Private Mortgage Insurance

$280 ………. Homeowners Association Fees

============================================

$3,841 ………. Monthly Cash Outlays

-$469 ………. Tax Savings (% of Interest and Property Tax)

-$734 ………. Equity Hidden in Payment (Amortization)

$231 ………. Lost Income to Down Payment (net of taxes)

$107 ………. Maintenance and Replacement Reserves

============================================

$2,976 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$6,950 ………. Furnishing and Move In @1%

$6,950 ………. Closing Costs @1%

$5,560 ………… Interest Points @1% of Loan

$139,000 ………. Down Payment

============================================

$158,460 ………. Total Cash Costs

$45,600 ………… Emergency Cash Reserves

============================================

$204,060 ………. Total Savings Needed

Property Details for 51 CEDARLAKE #84 Irvine, CA 92614

——————————————————————————

Beds: 3

Baths: 2

Sq. Ft.: 2200

$316/SF

Property Type: Residential, Condominium

Style: Two Level, Other

Year Built: 1984

Community: 0

County: Orange

MLS#: S659826

Source: SoCalMLS

Status: Pending

——————————————————————————

Fantastic! The best ways to describe this wonderfully refreshed lake community home. With this ideal location you receive the best of all worlds. Quiet, tranquil neighborhood, tennis courts, pools, lake amenities, shopping, walking trails, and amazing schools makes it a joy to come home everyday. The home itself has a floor plan that not only speaks but yells out functionality, and elegance. Formal dining area, large vaulted living room cascading with natural light and cozy gas fireplace, functional kitchen and eating nook, and generous sized family room give the nuts and bolts to this interiors main floor that provide the perfect setting for all occasions. From day to day living, cozy family movie night, intimate dining and large family and friend gatherings you will not be disappointed. Three bedrooms upstairs give plenty of room for everyone to have their own space, including the master bedroom that boasts it's own reading enclave, gigantic walk-in closet, and spa like bath.

a floor plan that not only speaks but yells out functionality? Give me a break.

Have a great weekend,

Irvine Renter

25 thoughts on “Pending conforming loan limit decrease will make California houses more affordable

  1. Jack

    “However, according to CAR, more than 30,000 Californian homeowners will face higher down payments, higher mortgage rates and stricter loan qualification requirements when the limits drop.”

    Good. Excellent. This is precisely the protection American taxpayers need for GSE-backed loans.

    The conforming loan size should be dropped much further. It is absurd taxpayers are “on the hook” for $625k loans to purchase wildly overpriced homes using mortgages that greatly exceed sane debt-to-income ratios. But wall street banks with significant California home exposure would lobby mightily against a further reduction. Who cares about the taxpayers — bonuses must be paid.

  2. Swiller

    Amen. Bring those home prices down to levels for all us “regular” people to own a home. Here, here, (clink clink clink) “Here’s to home values dropping another 20% in O.C.!”

  3. SantaAnaRenter

    Private investors are slowly coming back to be ready for this (I know of 3 big players offering true Jumbo products), but with ridiculously tight UW (as it should be).

    Goes to show you how people think differently when lending their OWN money vs Governnent (not their own money).

    Max LTV 80%, but only for the ideal scenario (R/T, SFR, 1-unit, up to certain loan amounts). Have a 2nd home, investment property… LTV maxed as low as 65%.

    Want cash-out? Must be primary owner occupied with 720+ FICO. Investment property need not apply.

    Have reserves? Even for a non-cash out rate reduction you need 12 months PITI in the bank.

    Home listed for sale in past 6 mos? No cash out for you (they think you want to cash out and run).

    Etc, etc.

    It will be interesting to see how this plays out 🙂

    1. Lemon Spaceship

      “No cash out for you (they think you want to cash out and run).”

      Reminds me of “Dine and Dash”.

  4. Normally Silent Observer

    Unfortunately, unrealtors stink at economics. I wonder how many of the struggling real estate agents would defend higher prices if you taught them about price elasticity? What if it showed them that lower prices might equal more sales (likely the case in today’s low sales market)? More sales at lower prices will yield more commission dollars than hardly any sales at high prices.

    1. HydroCabron

      I have wondered at this for some time.

      Lower prices and more inventory mean more work for realtors, yet the NAR seems interested in preserving the stasis.

      The only conceivable answer is stupidity. Realtors are not known for their work in quantum electrodynamics. These are people who, with a few exceptions, spent their school years worrying about missing parties instead of missing class, because they didn’t understand anything going on in class, anyway.

      I’m still opposed to eugenics, BTW.

      1. winstongator

        Sales beget sales, and higher prices beget higher prices…until they don’t. It is ironic that sales volumes were so much higher when prices were so much higher (in a lot of the country, the rest they were just modestly higher, but there was still a lot more sales volume). Octal77 has it right below – when prices decline, RE seems to be a totally crappy investment. As long as prices are increasing, your leverage gives you outsized returns – 10% down on 200k, 20k in equity, 10% return and you’ve doubled your money in one year. 10% for 3 years and you’re ready for a 10% DP on an 800k home.

  5. Woodbury Renter

    It is possible that two people bought a house for speculative purposes, stopped paying the mortgage, let it go into foreclosure and then formed an LLC to buy it back at auction to later flip it for a profit? Wow. I know there is no proof for this but it is does seem like a diabolically simple way to abuse the system.

    1. Anonymouse

      Possible? Yes. But seems unlikely here, considering that the original buyer(s) lost their downpayment. Why turn around and sink more into it?

      Also, a public records search reveals no connection between “SD Growth Fund LLC” and the property’s now-former owners. They don’t appear to be members of the LLC.

      1. studio

        The originals owners split, The wife a Realtor got the house. Her office leased the house to tenants while she stooped paying her mortgage on the property pocketing the money till the foreclosure(recovering her down payments).

  6. Kelja

    IrvineRenter —

    I have read your blog for years now and also purchased your book. Have to say you are if not the most, one of the most, astute people around when it comes to Real Estate. Keep up the good fight and keep writing! And, kudos to your many intelligent commentators!

    Sincerely,

    CarlsbadRenter

  7. Mark

    C’mon man.
    Leave it to the NAR, CAR, OCAR to suggest that what Americans really need at this important economic juncture is more easy access higher sums of low cost debt for….buying houses. Isn’t that what got us into this mess in the first place? Don’t they read?

    Actually, I would think Realtors would SUPPORT the lower limits because of the knock-on effects of price deflation down to market demand and real incomes, which increases the likelihood of sales/inventory turns, and commission $. All this excessive gov’t intervention and risk taking has done is constipate the system for buyers, sellers, realtors.

    I don’t understand realtors aligning on the side of “homedebtors” and home sellers. Don’t they know that homesellers the ones wearing the Star Trek red shirts right now?

    Great stuff! This is why IrvineRenter sleeps well at night. There’s never a shortage of damning evidence that everything these clowns put to paper is self-serving and ignorant of the larger impact to the world economy, future generations and the US taxpayer.

    Nice one, CAR.

    1. octal77

      One theory I have as to why NAR, CAR, OCAR, etc won’t support lower limits is because for years the party line has been to characterize real estate primarily as an *investment*, — not a place to live.

      As a consequence, R/E agents will encourage potential buyers to over-buy and over-borrow.

      Much like any other Ponzi scheme, everybody is getting paid and happy until .. < <>>

    1. IrvineRenter

      They met this week and couldn’t decide on a what action to take. I am expecting to hear from them next week.

  8. Perspective

    “…Have you ever noticed that realtors only defend the interests of homeowners? …”

    We receive weekly mail from a husband/wife realtard team, and one of their “lines” in promo material is, “We have a proven track record of consistently getting the highest price for homes in your neighborhood.”

    I would like to call them, and ask if they solely represent sellers. I know the answer. I’d like to hand their promo material to buyers they’re representing in our neighborhood!

  9. QualityPicks

    Thanks IrvineRenter for taking the time to explain what I wanted to say in my post yesterday. NAR is coming up with some “sensationalist” arguments, like 30,000 people being shout out of home buying, when nobody will be left out. They may have to settle for a smaller home, maybe, but that will be it. Why does the government need to subsidize 700k homes?

    1. Axiom

      I lived in AZ during the boom and I never understood where all the people were supposed to come from to fill all those new houses, or how the infrastucture was going to handle the supposed influx, especially in some of the far flung burbs. Buckeye being one of the prime examples.

      From an AZ Republic article:

      “The population of Buckeye in the far west grew by 678 percent during the past decade. However, builders constructed homes for even more new residents.

      In 2000, the city had 2,348 housing units; in 2010, it had 18,207. Now, Buckeye’s housing-vacancy rate is one of the highest in the region at nearly 21 percent.”

      Read more: http://www.azcentral.com/arizonarepublic/news/articles/2011/03/11/20110311arizona-census-housing-data.html#ixzz1QFxcLWLh

    2. SanJoseRenter

      Jack: thanks for posting the yt link.

      It was both informative and entertaining.

      “I often see UHaul and Penske moving fans around here, but they’re loading, not unloading.”

      “Empty houses litter the Valley of the Sun.” 🙂

  10. DarthFerret

    The foreclosure train is back on track. (Until the next scandal, at least.)

    O.C. foreclosure auction notices up 32%
    http://www.ocregister.com/articles/percent-305845-down-mortgage.html

    Up 32% month-to-month and 10% YOY.

    Irvine foreclosure sale notices up 76%
    http://irvinehomes.ocregister.com/2011/06/23/irvine-foreclosure-sale-notices-up-76/18959/

    76%!!! Wowsers!!!

    Irvine’s rate is up 76% month-to-month and 4% YOY.

    Note that all of this is not really a major trend change in the market. It’s simply the resumption of a trend that was put on hold by the robo-signing scandal and some other delays in the foreclosure process. Something else to note is that, as dismal as this spring sales season was for OC home sellers, the double-dip in prices occurred with a temporarily constricted supply. If the REO spigot had not been temporarily turned off, the price declines of the past few months would have been even steeper.

    -Darth

  11. brianguy

    guess this will be the 3rd “leg down”, unless I’m miscounting. man, this ride is even better than the park brochure made it look.

    it had nearly started to slip my mind just how complicit these conforming loan limits were in pumping up OC real estate circa 2008, and couldn’t remember when exactly they were supposed to expire, since it seems like it’s been forever since they were enacted yet they never did. but then, we’re living in a world (ok, state) with 5 year ‘temporary’ tax hikes. so I guess nothing’s surprising.

    thanks for the timely refresher.

  12. brianguy

    Oh yeah, the property…

    Please come back to this one in September and update us if (when) it’s still unsold and the alarm bells set in. would like to know how many price reductions will have taken place by then. wonder what the break-even point is. attempting a $700k condo flip in 2011 in lakeside Irvine? can’t believe these things still exist out there.

    1. irvine_home_owner

      It’s been under contract since May 24.

      Considering a similar model sold for $720k a month ago, $700k is actually reasonable.

      You may not believe it, but the comps exist.

Comments are closed.