Keeping Perspective on Loan Limits

After three years of high-profile existence, the increased conforming loan limit faces its final days.

The Housing and Economic Recovery Act of 2008, which raised the limit on low-interest, easier-to-qualify-for FHA, Fannie Mae and Freddie Mac-backed loans from $417,000 to $729,500, was originally conceived as a temporary solution scheduled to run for a year. Subsequent extensions pushed the program into 2011. It is slated to end Oct. 1.

That day, the conforming loan limit for high-cost regions will fall by 14 percent, to $625,500. According to the California Association of Realtors, this will leave some 30,000 California families facing “higher down payments, higher mortgage rates and stricter loan qualification requirements”  unless someone steps in to extend – or make permanent – the $729,500 limit.

Also according to the CAR and the National Association of Realtors, Marin County will be among the counties hit hardest by the change, should it occur.

Their data shows 12.2 percent of Government Security (GSE)-backed and 13.3 percent of FHA loans disappearing on Oct. 1, among the highest figures in the Bay Area.

Prior to the 2008 limit increase, conforming loans gave their buyers approximately $521,000-worth of buying power, assuming a 20 percent down payment. At $729,500 that number increased to roughly $915,000. It will decrease to $790,000 if the limit becomes $625,500 – enough to buy a mansion in Cedar Rapids and a two-bedroom condominium in most Marin County cities.

Once again, the Federal Government is demonstrating that Bay Area cost-of-living realities have no place in determining national policy.

At first blush, this seems like news that might spur panic among buyers and Realtors here in middle-class San Rafael. It is difficult to determine exactly how big an impact the increased conforming loan limit has made over the past three years, but my hunch is that it was pretty major. That doesn’t mean, however, that reducing the limit to $625,500 will mean the end of the world for San Rafael real estate.

CAR and NAR are going to do their best to make $729,500 a permanent limit. That’s their business, and it is crucial for cities with a boatload of homes priced between $790,000 and $915,000 – something San Rafael once was, but is no longer. $625,500 is 14 percent less than $729,500.

Well, in May, the mean price for single-family homes sold in San Rafael was $758,795, 12 percent lower than it was in May, 2008. Even on Oct. 2, 2011, $758,795 will still be well within reach for buyers putting down 20 percent and looking for a conventional loan.

As of July 12 there were 198 active or pending single-family home listings in San Rafael. They ranged in asking price from $319,150 to $5.995 million. While 139 of them were priced below $915,000, 18 fell into the $790,000 to $915,000 range. Once the driving force behind the 2009-2010 market thaw, that “sweet spot” now includes only 9 percent of the San Rafael single-family home market.

San Rafael presently has 119 condominium listings. 118 of them are priced below $790,000. So overall, homes impacted by the coming decrease in conforming loan limits comprise 5.6 percent of available real estate in San Rafael, 0.3 percent lower than CAR's predicted state average.

It would have been nice to continue doing business at the $729,500 level and there’s no doubt the change will scare off some borderline buyers. Making the higher number permanent would send a positive message to Californians – “We understand that it is much more expensive to live where you live, even as we continue to insist that your $200,000 income makes you ‘wealthy’!” – but for practical purposes, lowering the limit 14 percent, to $625,500, isn’t going to change day-to-day business in San Rafael all that much.