Question: How do you stimulate the housing market, when virtually no one can get a mortgage of greater than $417,000?
That’s the limit on so-called conforming loans in most parts of the country. Bigger loans, called jumbo mortgages, are hard to get and carry significantly higher interest rates and large down payments. The reality for most people is that everything else is cash beyond the $417,000 conforming loan. Try buying a house on that in one of this country’s talent-magnet cities. And what if you have to renovate? From Bloomberg:
“The only jumbo mortgages being written right now have strict qualification criteria both in the credit rating of the borrower and the down payment requirements and they are nearly impossible to qualify for,” Mehl said. “Some lenders quote a jumbo rate but they don’t make the loans.” … Habetz said he had a customer with a 740 credit score who had a down payment of $500,000 on a $1 million home in Easton, Connecticut. The borrower had to wait two weeks for approval when in December he would have gotten the mortgage overnight. “Mortgage lending right now is like wading miles and miles in waist-deep mud,” Habetz said. “It’s so difficult. Jumbo borrowers will be tortured and it’s nothing they should take personally because everybody is getting tortured.”
Expect the housing market to continue in its current zombie state for some time.
February 20th, 2009 at 11:59 am
While I agree this suggests that a housing led exit to this economic malaise may be further off, perhaps, this is a “long-run” blessing in disguise for two reasons.
First, it could be what US urban social-economic development needs in order to spur the creation of smaller homes, which are often more ecologically sound and create more density, offering more amenities. If there is a market of people who can afford $375K, but no more, someone will create homes in this range. They might not be 4000 s.q. mansions, but something more appropriate for a couple with 0 or 1 child.
Second, maybe downpayments need to be bigger in order to avoid the negative equity trap that is preventing people from relocating to the places with jobs. The larger the value of the house, the more important that the owner puts equity into it.
February 20th, 2009 at 12:07 pm
Richard,
You’re right about the zombie state of the market. I love the invective language in the quote – “nearly impossible, wading in mud, getting tortured.” Usually the examples in these kinds of stories are exceptional. There are just far too many homes in the price range requiring jumbos than people who can honestly afford them. We have to wait for prices to come down, which wil be mostly due to successive ownership where owners take small successive losses (knife catching).
I think only people making north of $120k and having good credit should even look at a $417K mortgage to begin with. Three times, maybe 3.5 times earning is max. That’s maybe the top ten percent of household income? Problem is, those households tend to have volatle income in lean times as often more than one person is a breadwinner and loss of one job cuts income in half; jobs like finance and real estate that bring in high earnings are hemmorhaging.
One needs to buy a $200k condo when earning only $50k with some money down, somewhere close to work, and build up equity so the next home, should it cost north of $417k, will only require a conforming mortgage to cover the difference.
February 20th, 2009 at 12:17 pm
Jumbo mortages SHOULD be hard to get. It SHOULD be the financial equivalent of a proctologist exam.
ALL mortages should be like that!
I just re-fied with Wells Fargo. Even now, they really didn’t care to know where I worked and how much I made. They didn’t ask to see tax returns. They didn’t ask for brokerage balances or anything like that.
It was way too easy to get the mortgage. Whatever happened to due dilligence?
February 20th, 2009 at 3:23 pm
I come pretty close to agreeing with Buzzcut. While I think there’s way too much paperwork involved and extra charges added on, someone with a 50% down payment is still borrowing the other half. On the other hand once you do qualify, the high interest rates caused by financial nervousness are going to slow sales of more expensive houses.
A quick look at Zillow shows that the US average home price is $180,000, Portland is roughly $360,000, Boston is $384,000. Granted these aren’t always the “best” neighborhoods, but price doesn’t keep people entirely out of housing.