Buying a More Expensive Home Just got Cheaper
Conforming Home Loan Limits Have Risen, Will Home Prices Follow?
Much has changed in the post pandemic world. One of the major shifts is how people view their home. It is no secret people are spending more time in their domicile than ever before. Many homeowners have decided their house no longer meets their evolving needs. Whether they want a fancy home office or just more room for the family, many homeowners have at least one eye on the market. Some of these people have moved into something new, while others have renovated their current home. However not all potential buyers have been able to fulfill their hearts desire of a new home with all the perks. There are many obstacles, but two of the main ones are:
Ability to save up for a down payment.
Ability to qualify for a loan with the current lending requirements.
This past week in a press release, the FHFA just made those two concerns much less of an issue for many potential purchasers. By changing the conforming loan limit in over 95% of U.S counties it will allow those buyers to purchase more home, at a lower interest rate. Why do confirming loans have a cheaper interest rates?
Because they are the only loan type that meet the requirements to be acquired by Fannie Mae and Freddie Mac on the secondary market. This is the easiest way for a lending company to get loans off their books, and free up cash for new loans coming in. The most common non conforming lending product is a Jumbo loan. Typically these loans cost the purchaser 1-1.5 percentage points more than a conforming product would. So if you get a 3.25% rate on a conforming product you would likely get 4.25-4.5% with a Jumbo. Rate is not the only thing that comes into play. Other items such as debt to income ratio, down payment, cash/asset reserves, and other factors also change and become more stringent when buyers find themselves using non conforming loan products.
The Cause
So what caused the FHFA to raise the conforming limit? Well, for those of you living under a rock, it is pretty simple. Home prices have skyrocketed in the post pandemic world. The FHFA wont come out and directly say it, but I will. Asset inflation is upon us, and in a big way. According to the National Associations of Realtors (NAR) national home sales are up 13.1% year over year (in my market for example it is closer to 20%).
The Effect
The conforming loan limit has been raised from $596,850 to $684,250 in my local market (Denver Co). Just 90 minutes from Denver into the mountains in BOOMING Summit County, they have raised the limit to $856,750. This gives potential buyers the ability take out a larger loan, pay less for it, with less skin in the game (smaller down payment)… all backed by the federal government. As more buyers become aware of this change, it may lead to them looking for a property with those features they have been lusting for in the post COVID world.
Final Thoughts
Winter is coming? No. Spring is coming and I expect it to arrive early. In an effort to keep the “American Dream” alive, powers in Washington are using many different vectors to make sure the real estate market stays on its current trajectory. As inflation continues to trickle down, expect the FED to suggest rate hikes in the near future. This will cause additional “FOMO” with buyers as they will want to lock in the best rate possible before it is “too late”. Couple that “FOMO” with increased buying power, and you have many of the ingredients needed for another bull run.
If you are a seller, I would suggest you get all of your ducks in a row now and be ready to ride the wave. Expect most of the equity gain in 2022 to materialize in the first half of the year (February-June).