Homebuyers hoping for some reprieve from high home prices may be sorely disappointed after the latest announcement from Federal National Mortgage Association, or Fannie Mae (FNMA 1.75%), and the Federal Home Loan Mortgage Corporation, or Freddie Mac (FMCC 1.68%), which, according to the Wall Street Journal should raise loan limits for single-family conforming loans to as much as $1 million. In an attempt to combat the expensive housing market, this loan limit increase will make it easier to get a loan on expensive homes but may cause home prices to rise even further.
Homes are getting more expensive
Home prices have skyrocketed over the past year, at an average national appreciation rate of 19.8%. Many high-demand markets have risen even faster. Boise, Idaho for example, has seen an over 41% increase in home values over the past year. Austin, Texas, is right behind, with home values increasing 40.6% year over year.
Low interest rates, which incentivize homebuying, and a national housing shortage have created the perfect storm for home values to rise over the past year. When policies are enacted that make getting loans easier or cheaper, naturally consumers buy more. Demand without an increase in supply means prices go up. And the increase in loan limit levels should incentivize more homebuying despite no major influx predicted for home supply.
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Changes are coming
Previously, the loan limits for a single-family conforming home loan were a baseline of $548,250 up to $822,375 in more expensive markets. The new loan limits, which are expected to be formally released by the Federal Housing Finance Agency (FHFA) on Nov. 30, 2021, project the baseline to increase to $650,000, going as high as $1 million in more expensive markets.
While $1 million may seem like a lot for a home if you live in an area where the median home price is $350,000, in some markets, a $1 million home is the norm. Los Angeles, for example, has a median home price of $918,000, meaning the majority of the homebuyers in the metro likely faced challenges when trying to obtain a home loan because the purchase price was outside of conforming loan limits. While not always the case, nonconforming loans can be harder to obtain because not as many lenders issue these types of loans.
Fannie Mae and Freddie Mac play a significant role in the housing market, having purchased around 60% of newly originated mortgages in 2020. They are a key piece of keeping the financial markets moving when it comes to the purchase and sale of mortgage-backed securities (MBS).
By increasing the limit, Fannie Mae and Freddie Mac will have a greater pool of loans to purchase, thus incentivizing lenders to loan under these new conforming standards because they know it's backed by the government. There is a chance mortgage rate will increase in 2022, but the Federal Reserve has indicated interest rate increases aren't likely until the end of the year, or early 2023, meaning home prices may just keep climbing.
