Loan Affordability

Higher FHA limits are a start.

February 1, 2008

Interest rates are falling and, at the end of last year, the average rate for a long-term, fixed-rate mortgage was hovering below 6 percent, yet home sales continue to perform weakly relative to the solid wage and wealth growth we’ve been seeing in the country.

Clearly, the virtual disappearance of subprime mortgage products after the temporary credit crunch last fall is responsible for an important part of the lag: Existing homes were selling at a roughly 5 million unit pace at the end of 2007, down 20 percent from a 6.2 million unit pace earlier in the year.

But with our historically low interest rates and the FHA poised to regain some of the market share it lost to aggressive subprime lenders during the boom, a pick-up of demand is waiting in the wings.

The U.S. Senate in late December passed long-sought FHA changes that include higher loan limits, something REALTORS® have been seeking for years. The House earlier in the year passed its own version of the changes, and now Congress must reconcile the two versions and the president must sign the final legislation. That means we could see the FHA much more competitive in higher-cost markets, such as many areas of California, in 2008.

Even so, we won’t see a straight rise in home sales, for several reasons. First, home buyers are not hurrying to make a purchase decision; there remains a nice selection of inventory to choose from, so households will be much choosier. Also, some buyers are waiting for foreclosures to top out.

But also, there remain some households who would like to buy but can’t because of the artificially low $417,000 loan limit for Fannie Mae and Freddie Mac. Unfortunately, although Congress has seen fit to pass higher FHA loan limits, it continues to debate higher conforming loan limits.

Higher limits are important, especially in high-cost markets, because borrowers enjoy substantially lower financing costs with these products than with jumbo and other nonconforming loans.

Given the limited share of conforming loans in our highest-cost markets, Congress must take the next logical step and make conforming loan limits affordable to buyers in high-cost markets.

Lawrence Yun
Chief Economist and Senior Vice President of Research at the National Association of REALTORS®

Yun oversees and is responsible for a wide range of research activity for the association including NAR’s Existing Home Sales statistics, Affordability Index, and Home Buyers and Sellers Profile Report. He regularly provides commentary on real estate market trends for its 1.3 million REALTOR® members.

Dr. Yun creates NAR’s forecasts and participates in many economic forecasting panels, among them the Blue Chip Council and the Wall Street Journal Forecasting Survey. He also participates in the Industrial Economists Discussion Group at the Joint Center for Housing Studies of Harvard University. He appears regularly on financial news outlets, is a frequent speaker at real estate conferences throughout the United States, and has testified before Congress. Dr. Yun has appeared as a guest on CSPAN’s Washington Journal and is a regular guest columnist on the Forbes website and The Hill, an “inside the beltway” publication on public affairs.

Dr. Yun received his undergraduate degree from Purdue University and earned his Ph.D. from the University of Maryland at College Park.