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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




2 San Jose, CA




3 Fairfield County, CT




4 Orange County, CA




5 Ventura County, CA




6 San Diego, CA




7 Middlesex County, MA




8 New York, NY-NJ




9 Oakland, CA




10 Boston, MA




Note: Among 100 largest U.S. metros

The metros with the smallest shares of for-sale homes above the local limit include El Paso, Little Rock, and Memphis in the South and Southwest; Dayton, Toledo, Akron, and Detroit in the Midwest; and the upstate New York metros of Rochester, Syracuse, and Buffalo. Relative to the low home prices in these metros, the $417,000 loan limit is very generous. In some of these markets, 4000 square-foot homes typically fall within the conforming loan limit. More broadly, in 48 of the 100 largest metros, fewer than 10% of homes for sale would be above the local conforming limit.

Housing Markets With Lowest 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 El Paso, TX  $        417,000



2 Dayton, OH  $        417,000



3 Toledo, OH  $        417,000



4 Rochester, NY  $        417,000



5 Syracuse, NY  $        417,000



6 Little Rock, AR  $        417,000



7 Akron, OH  $        417,000



8 Memphis, TN-MS-AR  $        417,000



9 Detroit, MI  $        417,000



10 Buffalo, NY  $        417,000



Note: Among 100 largest U.S. metros

In short: despite higher loan limits in high-cost areas, conforming loan limits do not reflect the huge cost differences in housing markets across America. For loan limits to reflect the differences across local markets, the spread between loan limits in inexpensive markets and loan limits in expensive markets would have to be much larger than it is today. The gap between the national baseline of $417,000 and the maximum high-cost-area limit of $625,500 is much smaller than the difference in home prices; furthermore, markets with the national baseline loan limit of $417,000 include a wide range of local markets, from mid-to-high priced metros like Denver, Portland, and Miami to much cheaper metros like El Paso and Dayton.

But – you might ask — aren’t the people buying homes in expensive markets rich? Not necessarily: in expensive markets, households spend more of their income on housing. In fact, Census data show that median household incomes for homeowners whose homes are near the conforming loan limit were significantly lower in metros where more of the market is priced above the local loan limit. For instance, among households that own homes near the local loan limit, the median income of those households in San Francisco (where 61% of homes are above the local loan limit) is less than $120,000, while the median income of those households in Houston (where just 13% of homes are above the local loan limit) is $172,000. In other words, a San Francisco household is less likely to own a home that falls within the local conforming loan limit than a Houston household with the same income. More broadly, the correlation across metros between (1) the share of homes over the local loan limit and (2) median household incomes among homeowners whose homes are near the limit is negative (-0.37) and statistically significant. Therefore, the current system of conforming loan limits isn’t sufficiently aligned with local home price differences to give households at the same income level similar access to conforming loans.

The Complicated Politics of Loan Limits and Housing Policy
If conforming loan limits don’t reflect actual differences in local home prices, why not change the loan limits as part of overhauling the entire national housing finance system? Because changing loan limits would mean hurting or helping some local areas more than others, and that’s tricky politics. Lowering the limit in low-cost areas or raising it further in high-cost areas are both politically unrealistic:

  • Lowering loan limits in specific local markets would meet resistance from those areas’ elected officials. A lower loan limit would push more borrowers into the jumbo category, which, as explained above, means mortgages that are (at least historically) more expensive and more difficult to get.
  • Raising the loan limit further in high-cost areas would benefit borrowers in those areas but would increase the share of mortgages guaranteed or insured by the government – which runs counter to a central goal of national housing-finance reform, which is to reduce the mortgage market’s dependence on government.

Furthermore, aligning loan limits with home prices probably wouldn’t get bipartisan support. The current system of conforming loan limits favors “red” America, where home prices tend to be lower than in “blue” America. In the reddest housing markets – the 32 of the 100 largest metros where presidential candidate Mitt Romney got more votes than President Barack Obama in the 2012 Presidential election — only 10% of homes for sale are above the local conforming loan limit. But in the bluest housing markets– the 28 of the 100 largest metros where Obama beat Romney by at least 20 points – nearly twice as many homes for sale (18%) are above the conforming loan limit. Six of the 10 metros with the highest share of homes over the local limit (from the first table, above) are deep blue, including San Francisco, San Jose, Middlesex County, MA, New York, Oakland, and Boston.

Looking across the 100 largest metros, the correlation between (1) Obama’s margin over Romney in 2012 and (2) the share of homes for sale above the local loan limit is 0.39 (and statistically significant). Because the current system favors red housing markets, a change that would get loan limits more in line with home price differences would disproportionately help blue areas – and might not get much Republican support. (Side note: not all national housing policies favor red America. For instance, the average household in an Obama-voting state claims 66% more for the mortgage interest deduction than the average household in a Romney-voting state. The mortgage interest deduction benefits people where home prices are higher and where incomes are higher, which tend to be blue states.)

What will happen if the conforming loan limits don’t change, even as the housing finance system gets overhauled? Ironically, by removing the implicit subsidy and therefore reducing the cost advantage to borrowers of conforming loans, the Johnson-Crapo bill and other housing reform proposals might end up making conforming loan limits largely a moot point.  But the passage of these reforms is far from a done deal, and their implementation would be years into the future.

Until then, the failure of conforming loan limits to reflect local housing differences is likely to get worse, not better. In the housing recovery, home prices have been rising faster in the less affordable markets, so the gap in home prices between lower-priced markets and higher-priced markets has been widening. Our current system of conforming loan limits will fail to account for the large and growing differences in local housing markets.

Note: The conforming loan limits for 2014 are available here. Loan limits are determined separately for each county, but counties within a metropolitan area are all assigned a uniform loan limit. We calculated the share of for-sale homes, excluding foreclosures, for which an 80% LTV loan would exceed the local conforming loan limit. We also calculated the median square footage among homes for which an 80% loan would be within 10% of the local conforming loan limit. Both of those calculations were based on for-sale listings on Trulia as of March 22, 2014. We used the 2012 American Community Survey Public Use Microdata Sample to calculate median household income among owners of homes for which an 80% loan would be within 10% of the local conforming loan limit. Sample sizes limited the analysis of income to a few dozen metros. “Statistically significant” means at the 5% level.


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.”


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


2 Bethesda-Rockville-Frederick, MD


3 Virginia Beach-Norfolk, VA-NC


4 Honolulu, HI


5 Dayton, OH


6 El Paso, TX


7 Colorado Springs, CO


8 Oklahoma City, OK


9 Albuquerque, NM


10 Bakersfield, CA


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

At the other extreme, less than 1% of total local wages go to federal employees in Fairfield County (across the Connecticut border from New York), San Jose, and Allentown, PA-NJ.

Metros Where A Government Shutdown Could Hurt Least

# Metro % of Local Wages Going to Federal Workers
1 Fairfield County, CT


2 San Jose, CA


3 Allentown, PA-NJ


4 Lakeland-Winter Haven, FL


5 Charlotte, NC-SC


6 Orange County, CA


7 Akron, OH


8 New York, NY-NJ


9 Hartford, CT


10 Baton Rouge, LA


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

But San Jose and New York aren’t completely immune from the shutdown, of course: people and businesses there, like everywhere, depend on federal government services. Furthermore, the harm from a government shutdown would be minimal compared with the damage that the government could cause later this month if it hits the debt ceiling, stops paying some or all of its bills, and triggers a financial crisis. Everyone – not just federal employees and people who want to sell their homes to them – needs to be watching Washington D.C. this month.

These data are from the Quarterly Census of Employment and Wages (QCEW), which reports total local wages for all employees and for federal workers, for the first quarter of 2013. The metro rankings and magnitudes are similar using the share of employment (instead of wages) from the QCEW or from the American Community Survey (ACS).


Better Off Than 4 Years Ago? Voters Didn’t Care

Obama got less, not more, of the vote in 2012 relative to 2008 in metro areas where unemployment fell and home prices rose during his first term.

Jed Kolko, Chief Economist
November 14, 2012

(After publishing this post, we got great feedback and decided to do a more technical and detailed follow-up, which is here — JDK.)

Why did Obama win? Throughout the campaign and in exit polls, voters said the economy was their #1 issue. But election data shows that voters did not reward the President in markets where the jobs and housing recoveries are strongest.

How Obama Fared In 2012 Versus 2008
To see how the local housing and jobs recoveries affected the election, let’s first compare Obama’s margin in 2008 with Obama’s margin in 2012, using county-level election results compiled by the U.S. Election Atlas. Nationally, the latest count shows that Obama won 50.6% of the popular vote in 2012 compared to 47.8% for Romney – a margin of 2.7% (the numbers don’t add up due to rounding). In 2008, Obama won 52.9% versus 45.7% for McCain – a margin of 7.3%. Nationally, therefore, Obama’s margin fell from 7.3% in 2008 to 2.7% in 2012 – a drop of 4.5 percentage points.

In general, in metro areas where voters  favored Obama in 2008, they favored him again in 2012. (The correlation between Obama’s margin in 2008 and Obama’s margin in 2012 across metro areas was 0.99.) But Obama’s margin grew in some metros between 2008 and 2012 while falling in most metros. Comparing the presidential votes in 2008 and 2012 among the 100 largest metros, Obama’s margin increased most in Miami and New Orleans. His margin also increased in New York and the upstate metros of Syracuse and Albany.

Where Obama’s Margin Increased the Most

# U.S. Metro

Change in Obama’s margin, 2012 vs 2008

Obama’s margin vs Romney, 2012

Obama’s margin vs McCain, 2008

1 Miami, FL




2 New Orleans, LA




3 New York, NY-NJ




4 Baton Rouge, LA




5 Edison-New Brunswick, NJ




6 Syracuse, NY




7 San Jose, CA




8 Albany, NY




9 Fort Lauderdale, FL




10 Columbus, OH




Among 100 largest metros.                               

In the other direction, Obama did worse relative to his Republican challengers in 2012 than in 2008 in most metros – and more than 10 points worse in Salt Lake City, Indianapolis, and Lake County – Kenosha County (just north of Chicago).

Where Obama’s Margin Decreased the Most

# U.S. Metro

Change in Obama’s margin, 2012 vs 2008

Obama’s margin vs Romney, 2012

Obama’s margin vs McCain, 2008

1 Salt Lake City, UT




2 Indianapolis, IN




3 Lake County-Kenosha County, IL-WI




4 St. Louis, MO-IL




5 Grand Rapids, MI




6 Kansas City, MO-KS




7 Omaha, NE-IA




8 Austin, TX




9 Ventura County, CA




10 Allentown, PA-NJ




Among 100 largest metros.    

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