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articles about “Housing Policy

Why Conforming Loan Limits Should Be Part of Housing-Finance Reform — But Aren’t

The current system of conforming loan limits falls far short of reflecting the actual differences in local home prices and ends up favoring borrowers in lower-cost markets. More than 30% of homes for sale in many California and Northeastern markets are above the conforming loan limit, versus less than 10% in much of the rest of the country. The leading housing-reform bill – the Johnson-Crapo bill – keeps loan limits intact, while making them matter less.

The U.S. housing finance system is national, but housing markets are local. Local markets often face different housing challenges: today, California’s coastal communities face an affordability crisis, while Florida is dealing with foreclosures and Detroit and other Midwestern cities are wrestling with neighborhoods of vacant homes. The housing finance system – as well as other national housing policies – needs to serve a country where local home prices in some markets are 10 times as high as in others, and where local and state laws affect how much new construction is allowed, how long foreclosures take, and more.

One way the national housing finance system explicitly accounts for local market differences is through the conforming loan limit – the maximum dollar amount of a home loan that Fannie Mae and Freddie Mac can guarantee (they purchase mortgages from originators, package them into securities that investors buy, and guarantee the payments in the event that a borrower defaults). Loans above this limit are “jumbos.” Until 2008, the conforming loan limit was the same throughout the country (Alaska and Hawaii are treated separately), but the 2008 Housing and Economic Recovery Act (HERA) granted “high-cost areas” higher conforming loan limits to reflect local price differences. Now, in 2014, the limit in high-cost areas is up to $625,500, which is 50% above the $417,000 limit that applies in most of the country.

For a borrower, one advantage of conforming mortgages is that they typically (though not currently) have a lower mortgage rate than jumbo loans; also, jumbo loans often require higher down payments, a higher credit score, or a lower debt-to-income ratio. Part of the rationale for having conforming loan limits – rather than allowing loans of any amount to be guaranteed – has been to target the benefits of conforming loans to borrowers buying more modestly priced homes and not to borrowers buying luxury homes.

This week, the Senate will markup the leading housing-reform proposal – the Johnson-Crapo bill – which would overhaul the housing finance system by replacing Fannie Mae and Freddie Mac, introducing an explicit but limited government backstop, and creating a new fund for affordable housing. Despite these major changes, the bill keeps current conforming loan limits intact. Is this implied vote of confidence in the current system of conforming loan limits warranted? Let’s assess how well these limits reflect local price differences.

Conforming Loan Limits Don’t Reflect Differences in Local Housing Prices
To see whether the conforming loan limits bind equally tightly across local housing markets, we calculated the share of for-sale homes on Trulia in each of the 100 largest U.S. metro areas that is above the local conforming loan limit, assuming an 80% loan-to-value (LTV) mortgage (that is, a 20% down payment — see endnote for details). If loan limits fully reflected local housing market differences, then a similar share of homes in every metro would be above the local loan limit. But the results show that a much higher share of homes is above the local loan limit in some metros than in others.

In the San Francisco metro area, 61% of homes for sale are priced above the conforming loan limit (the local limit, $625,500, equal the loan amount for an 80% LTV loan on a $781,875 home); the typical San Francisco home priced near the loan limit is a modest 1500 square feet. In several other California metros, as well as in New York and Boston and their respective neighbors of Fairfield County, CT, and Middlesex County, MA, 30% or more of the homes for sale are above the local conforming loan limits. These 10 metros with the highest share of for-sale homes above their respective local loan limit all are “high-cost” areas with limits above the national baseline of $417,000, but even with their higher loan limits, they have the highest share of homes for sale that would require jumbo loans.

Housing Markets With Highest Share of
For-Sale Homes Above Local Loan Limit

# U.S. Metro Conforming loan limit % of for-sale homes above local loan limit Median size of for-sale homes near local loan limit, square feet
1 San Francisco, CA

$625,500

61%

1,500

2 San Jose, CA

$625,500

43%

1,900

3 Fairfield County, CT

$601,450

39%

2,750

4 Orange County, CA

$625,500

38%

2,250

5 Ventura County, CA

$598,000

34%

2,400

6 San Diego, CA

$546,250

33%

2,300

7 Middlesex County, MA

$470,350

33%

2,400

8 New York, NY-NJ

$625,500

30%

1,500

9 Oakland, CA

$625,500

30%

2,100

10 Boston, MA

$470,350

30%

2,350

Note: Among 100 largest U.S. metros

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Why There’s Nothing New About Housing in the State of the Union

Trulia's Chief Economist comments on what wasn't said about housing during President Obama's State of the Union address, and why.

Jed Kolko, Chief Economist
January 29, 2014

In tonight’s speech, President Obama mentioned housing twice. First, at the start of the speech, he included the “rebounding housing market” as part of his victory lap. Second, he called on Congress to “send me legislation” that would protect taxpayers from paying for another housing crisis while keeping alive the “dream of homeownership.” That line was vague, and it didn’t bring down the house. What he meant was made clearer in the companion policy fact-sheet: Obama was referring to the four principles for housing-finance reform legislation that he outlined last August.

Why nothing new or specific about housing? There are plenty of housing issues that President Obama might have talked about. Affordability is worsening, mortgage credit appears tight, and delinquencies and foreclosures are still too widespread. Why did none of these make the final cut? Four reasons. The housing policies that Obama might have talked about were either:

1) Not pressing enough. The housing market is in the best shape of Obama’s presidency. Construction and sales in 2013 were both at their highest levels since before he took office, and prices have bounced back to within range of their long-term norms. Two of Obama’s main housing initiatives during his first term are less essential today:

  • Refinancing is less of a financial slam-dunk for households now that mortgage rates have risen.
  • Loan modifications are less urgent because rising prices and a strengthening economy have lifted millions of borrowers back above water and reduced the share of mortgages in default.

2) Mostly settled. A key measure to prevent a repeat of last decade’s crisis is now in place: the most contentious elements of the qualified mortgage / ability-to-repay and qualified residential mortgage rules were hammered out last year, and QM is now in effect. While the impact and evolution of these rules is still to be seen, the main features of the rules themselves have been settled.

3) Too local. Affordability concerns are growing, as prices and mortgage rates climb up from low levels, but affordability is a local, not national, crisis. In San Francisco, just 14% of homes for sale are within reach of a household with median local income, versus more than 80% in some metros in the Midwest and South. One key solution to an affordability crisis is also local: more construction in markets where demand is strong but supply is held back by regulations and other constraints.

4) Too messy. The huge, looming housing question is how to reform or replace Fannie Mae and Freddie Mac. The “send me legislation” line repeated Obama’s call last August for Congressional action on Fannie/Freddie reform. But tonight he didn’t reveal any new thinking on the fundamental challenge: how to keep the 30-year fixed-rate mortgage relatively cheap and widely available while minimizing taxpayer exposure to the next housing meltdown. Any housing-finance reform that could achieve that would be too complicated, too dependent on Congress, and would take too long to succeed for a speech about a “year of action.”

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Shutdown Hasn’t Hurt October Asking Home Prices So Far

Asking home prices in the first half of October are up 1% versus September. Prices changes are no different in metros more dependent on the federal government, like Washington DC, compared with metros less directly affected by the shutdown.

Jed Kolko, Chief Economist
October 16, 2013

How has the two-week shutdown of the federal government affected home prices? The main sales-price indexes won’t tell us until 2014: homes going under contract in October will close in November (or later), and November sales prices will get reported starting in January. But the Trulia Price Monitor shows how asking prices – a leading indicator of sales prices – are trending almost in real time, adjusting for both the mix of listed homes and for seasonality. This morning we analyzed asking prices between October 1 and October 15.

Finding the Effect of the Shutdown on Asking Home Prices
Nationally, asking home prices are up 1.0% between September and the first half of October, seasonally adjusted. This partial month-over-month increase is roughly in line with the month-over-month increases over the past few months. Before the shutdown started, several factors were already cooling down price gains, including expanding inventory, higher mortgage rates, and declining investor activity. Therefore, comparing how much prices have risen in October to date with previous months can’t, by itself, show whether the shutdown has affected asking prices.

Instead, to tease out the effect of the shutdown on asking home prices, we looked at price trends across individual metros. We compared price changes in metros where the local economy is more dependent on the federal government – like Washington D.C., of course, but other metros around the country as well – with prices changes in metros where the local economy is less dependent on the federal government. (Our measure of dependence on the federal government – and therefore likely impact from the shutdown – is the share of local wages coming from the feds.)

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Metros That Could Suffer Most from a Federal Government Shutdown

The Washington D.C. economy would suffer most in a federal shutdown, but other metros across the country could also be hit especially hard.

Jed Kolko, Chief Economist
September 30, 2013

The federal government could shut down tomorrow. Those who rely on certain government services and programs would be immediately affected, as would the federal employees who wouldn’t get paid. If it goes on for a long time, the shutdown could hurt the economy and therefore housing demand, particularly in the metros where people depend more on federal paychecks for their livelihood.

We looked at the share of total local wages going to federal employees. No surprise that Washington D.C. and its suburbs depend most on federal paychecks: 18.5% of Washington D.C.-area wages go to federal employees, and 12.6% in neighboring Bethesda-Rockville-Frederick, MD.

But other metros – even some that are thousands of miles outside the Beltway – are also very dependent on the federal government: more than 10% of total wages go to federal employees in Virginia Beach-Norfolk, Honolulu, and Dayton, OH.

Metros Where A Government Shutdown Could Hurt Most

# Metro % of Local Wages Going to Federal Workers
1 Washington, DC-VA-MD-WV

18.5%

2 Bethesda-Rockville-Frederick, MD

12.6%

3 Virginia Beach-Norfolk, VA-NC

11.8%

4 Honolulu, HI

11.2%

5 Dayton, OH

10.1%

6 El Paso, TX

8.7%

7 Colorado Springs, CO

8.0%

8 Oklahoma City, OK

7.7%

9 Albuquerque, NM

7.3%

10 Bakersfield, CA

6.8%

Data from Quarterly Census of Employment and Wages (QCEW). See note below.

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Housing in 2013: What’s In, What’s Out

What a difference a year makes. 2012 was the year the housing recovery came to life – with the market now stronger than anyone dared hope for a year ago. Here’s what 2013 has in store.

Jed Kolko, Chief Economist
December 13, 2012

One year ago, I wrote: “Even the best possible 2012 won’t get us halfway back toward normal.” That turns out to be true, but barely: the latest Trulia Housing Barometer, for October, showed us that the market is 47% back to normal. And this year, we launched the Trulia Price Monitor–which revealed back in March that asking prices were on the rise–one of the earliest indicators of the home-price recovery. All in all, the housing market enters 2013 with strong tailwinds, but that could change.

Trulia Housing Predictions 2013

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