New research from NAHB examines the scope of impact on housing markets from the scheduled October 1, 2011 decrease in the GSE and FHA loan limits. These loan limits determine what types of mortgages may be securitized by the GSEs, Fannie Mae and Freddie Mac, or insured by the Federal Housing Administration. Loans that fall outside of these limits would be subject to tighter credit conditions, including higher interest rates and larger downpayments.
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. As home sales are inter-related (for example, starter homes are sold to first-time homebuyers by move-up buyers), this 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 (2% 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% of U.S. homes) that will not be eligible for GSE-backed funding if they were put on the for-sale market. The 204 counties affected contain 27% 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 (5% of all U.S. homes) to those outside the temporary loan limits, for a total of 12.2 million homes (16% of U.S. homes) ineligible for FHA-insured mortgages. The 620 counties affected contain 59% of all homes in the United States.
Given the potential to weaken housing demand for homes that in October would fall outside of the present-law loan limits, plus spillover effects due to inter-related sales, the expiration of the present-law loan limits will be a negative factor weighing down housing in the Fall.
This analysis also suggests concern with respect to a recent proposal to eliminate the floor, or nation-wide minimum, for FHA loan limits nationwide. Under present law, and counting U.S. territories like Puerto Rico, 2,475 counties have FHA-loan limits at the floor ($271,050). As of October 1, 2011, this number will grow to 2,773 as the counties described earlier experience a drop in their applicable FHA loan limit. Under a proposal to eliminate the FHA floor, the vast majority of these counties, comprising about 85% of all counties, would experience a decline in the number of homes eligible for FHA-insured mortgages, increasing mortgage costs for a significant number of home purchases in the United States and adding to downward price pressure.