The Federal Housing Finance Authority, or FHFA, just announced it is increasing the limit for conforming mortgages from $417,000 to $424,100 in most regions of the United States starting Jan. 1, 2017—the first such increase since 2006.
This has to help home sales, as conforming fixed rates guaranteed by Fannie Mae and Freddie Mac are the lowest fixed rates, so raising the conforming limit for that rate will allow more home buyers to afford a home.
Total existing-home sales, which are completed transactions that include single-family homes, townhomes, condominiums and co-ops, grew 2.0 percent to a seasonally adjusted annual rate of 5.60 million in October from an upwardly revised 5.49 million in September. October’s sales pace is 5.9 percent above a year ago (5.29 million) and surpasses June’s pace (5.57 million) as the highest since February 2007 (5.79 million).
The approximately 1.7 percent bump in the baseline conforming loan limit follows the FHFA’s announcement that the average U.S. home price has returned to its pre-decline peak, which it hit in the third quarter of 2007. The FHFA bases the loan cap on its quarterly Housing Price Index, which gauges average single-family home prices. The index rose 1.5 percent during the third quarter of 2016 and is up 6.1 percent over the past year, enough to push it above its previous high point.
The FHFA is the supervising entity of conforming loans guaranteed by Fannie Mae and Freddie Mac.
FHFA house price index eased slightly in September and was up 0.6 percent after increasing 0.7 percent in August. On the year, the FHFA index surged to plus 6.1 percent, down from August’s gain of 6.4 percent. In the third quarter, house prices were up 1.5 percent and were 6.1 percent higher than the third quarter in 2015.
Eight of nine census divisions posted monthly gains in September ranging from plus 1.3 percent in the in the Pacific with the Northeast declining 0.2 percent. On the year, the Pacific region was up 8.1 percent with New England in the rear at 2.9 percent.
Conforming loan limits are significant because they apply to home loans that meet the underwriting guidelines of Fannie Mae or Freddie Mac, the government-sponsored entities that acquire mortgages from lenders and ensure a steady flow of money to the mortgage market.
Interest rates for nonconforming, or jumbo mortgages, are generally higher than rates for loans that fall under the cap, and these types of mortgages can be more difficult to obtain.
“Today’s conforming loan limit increase is a much-needed recognition of rising home prices in high-cost markets, and a help to first-time and lower-income borrowers looking to utilize an FHA mortgage,” said NAR President William E. Brown. “Credit remains tight, but this decision will help more qualified buyers address the hurdles and high costs standing between them and the dream of homeownership.”
Conforming loan limits are higher than the baseline cap in parts of the country where home prices are especially high, but cannot be more than 150 percent of the baseline limit—$636,150 for 2017—for the contiguous U.S. Exceptions are established for Alaska, Hawaii, Guam, and the U.S. Virgin Islands, where loan limits in specific locations may exceed that amount.
Harlan Green © 2016
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