Jumbo Mortgage? Jumbo Losses!
By Ryan Healy | February 14, 2008
Here’s another factor putting downward pressure on the housing market, especially for homes worth $417,000 or more: jumbo mortgages.
A jumbo mortgage is classified as any home loan greater than or equal to $417,000. Basically, if you purchase a home worth $439,000 or greater, chances are you’ll need a jumbo loan, even after your down payment.
But the lending standards for qualifying for a jumbo loan have tightened up to the point where very few people can qualify for them. What happens when few people can qualify for jumbo loans? The number of homes sold in the $450,000 range begins to plummet.
Which is exactly what’s happening right now according to this Business Week article.
My best guess: As the number of homes sold declines, prices will fall as well. And the prices will keep falling until they no longer require a jumbo loan to purchase the home. Currently, that is the only way to widen the market enough to stimulate demand.
Of course, the government could try to step in and redefine jumbo loans as $600,000 and up, but I think that’s highly unlikely since they’d have to have the banks cooperation to do something like this.
This is bad news if you own an expensive home; but it’s very good news if you’re in the market for a home and you’ve got time to let the prices fall. You may wind up with a nice home at a huge discount.
Last weekend, my wife and I drove out to a neighborhood we are interested in. A spec home we looked at last summer is still for sale. We wondered how much the price had come down. We were surprised it had dropped only $10,000. Base prices for new homes hadn’t dropped at all. The only “bargains” were on the spec homes.
And this is a neighborhood that is 38 miles from downtown Denver and not at all conducive to commuting. I had assumed prices would be dropping faster in rural areas like these. But perhaps the developers are still in denial. They don’t believe a recession is in the works.
Right now, it seems the better deals are going to happen in resale homes, unless you’re dealing with a home builder who lacks financial strength. If a home builder has huge cash reserves, they may not be motivated to negotiate much. They may be inclined to simply wait until the market recovers. But if a home builder is financially weak, there will be much more room to negotiate.
Our lease is up 9/30/08, so we’re keeping a pulse on the market. We may buy or we may continue to rent. We’ll just continue to watch to see what happens in our county, our state, and the U.S. at large.
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Topics: Mortgages |
2 Responses to “Jumbo Mortgage? Jumbo Losses!”
Comments
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February 28th, 2008 at 6:06 pm
I agree with most of what you said. I am a residential loan officer and Jumbo underwriting standards have increased for sure. Just wanted to mention that the banks would have little to do with the decision to raise the conforming limit amount of 417k higher. Fannie Mae and Freddie Mac basically have control on this. Reason being that almost all banks and lending institutions sell these mortgages and they almost always are purchased by Fannie or Freddie. That is why Fannie or Freddie make a change to what loans they will purchase it affects the entire industry immediatley. About a year ago Freddie came out and said they would no longer be purchasing certain “stated income” loans. This put some riskier lenders out of business because they no longer had someone to sell their loans to.
Just some FYI
February 29th, 2008 at 7:57 am
Rob - Thanks for the clarification. I appreciate it. Helps to have some insight from an “insider.”