Many individuals waited apprehensively until the spring home selling season to put their homes on the market. Thousands of these homes were purchased at the top of the real estate market and are now worth substantially less than their purchase prices. Unfortunately, the spring selling season is not off to a roaring start and sales look like they will remain low. Mortgage applications decreased by 6.7 percent for the first week of April 2011. During the same time-period purchase applications declined by 4.7 percent and mortgage refinancing decreased 7.7 percent. (Wells Fargo Research, April 15, 2011).
I have a theory about why housing demand was low during the first week of April and continues to be soft. To my way of thinking, the current loan limits of Fannie Mae (www.fanniemae.com) and Freddie Mac (www.freddiemac.com) have greatly contributed to this moribund market. As of the first quarter of 2011 federal and related agencies held $5.87 trillion in home-mortgage debt compared to $1.21 trillion in private-issued mortgage backed securities, $2.87 trillion held by banks and other savings institutions (as whole loans in their portfolios), and $493.8 billion held by others (Wall Street Journal, June 20, 2011). These statistics indicate that Fannie Mae and Freddie Mae provide the majority of support for housing loans. Consequently, the credit guidelines of Fannie Mae and Freddie Mae dominate housing sales.
Here’s my observation, every three-months I receive a card from a local real estate broker in Alexandria, VA. The card includes data about 20 to 25 one-unit homes sold in my neighborhood in the last quarter. In contrast to previous cards, all of the homes are selling prices below $1 million. Additionally, home owners are reducing their prices by three to five percent to arrive at a selling price that is below $1 million. Here is my theory about why the homes are selling at prices below $1 million and why this trend will continue.
The Fannie Mae 2011 conventional loan limit is $417,000. However, in high-cost areas for loans originated on or before September 30, 2011 this amount can be greater than $417,000. These “high cost” areas are established for each county (or equivalent) and published online at www.eFannieMae.com and on the FHA Web site located at www.fhfa.gov. For example, loans for a one-unit home in the Washington-Arlington-Alexandria, DC-VA-MD-WV (Metropolitan Area) have a loan limit of $729,750.
Let’s do a little math, if you are approved for a $729,750 loan and make a 20 percent down payment (about $182,438), you can purchase a home priced at $912,188. With a 25 percent down payment of $243,250 you can buy a home priced at $973,000. This next example shows the break point for home buying. Purchasing a home priced at $1, 042,500 with a 30 percent down payment is about $312,750. This amount is nearly twice the down payment amount for the $912,188 priced home. With this in mind, it is easy to see what makes housing demand low for upscale homes. To sum it up, without a change in the Fannie Mae guidelines this downward pressure on home prices is likely to continue.
