Throughout 2015, industry executives cited mortgage loan limit caps as a major headwind to growing their origination volume. Data released yesterday from the Mortgage Bankers Association showed that the Federal Housing Administration (FHA) share of total mortgage applications slipped marginally last week versus the previous week, from 14.6% to 14.4%. This ratio is expected to increase in the coming months since the new FHA loan limits went into effect on January 1st. Our Manager of Housing Economics, Ali Wolf, breaks down the changes below.
The FHA announced the good news in early December when they published increases to prevailing loan limits. The new regulation, issued in response to rising home prices, increased loan limits in 188 counties effective January 1, 2016. Since FHA loans require low down payments and are typically easier to qualify for than other options, increasing its loan limits can provide a boost in sales for:
- Cities with a high percentage of first-time buyers
- Areas with particularly expensive housing metros and a large proportion of low-income buyers
- Individuals with relatively low credit scores.
The range for limits on loans obtained with FHA underwriting varies from city to city, but is currently capped at $625,000 for high-cost metros and has a floor of $271,050. Builders often price their projects to be within the FHA’s respective parameters, which can be restrictive if individual units don’t pencil within that range.
Below we highlight the FHA loan limit changes for five top markets across the country. Note, The Federal Housing Finance Agency (FHFA) also increased loan limits for GSE-conforming loans, but in just nine high-cost metros; the most noteworthy changes were in Denver, Seattle, San Diego, and Nashville.
|LOAN LIMIT CHANGE|
|Market||2015 Limit||2016 Limit||Change|
Denver, San Jose, and San Francisco are currently tied as the hottest housing markets in the US with strong home sales and robust economic fundamentals. Denver house price appreciation continues unabated. In November, the median closing price for a detached new home was $444,629 (up 6.1% YOY), and the new FHA and FHFA loan limits of $458,859 managed to hit the sweet spot. According to Meyers Research’s Denver expert, Mike Rinner, the adjustments to both loan types will increase demand for homes priced in the $400,000 to $460,000 range in Denver, providing demand-driven support for further price appreciation for homes originally priced within those bounds.
The higher loan limits highlight the continued strength of the Dallas housing market as well. Since the employment-to-permit (EP) ratio of 1.0-1.2 is considered balanced, Dallas’s EP current ratio of 1.8 strongly suggests that the demand for new housing (fueled by job growth and corporate relocations) is outpacing existing supply.
Housing demand also remains strong in Seattle; a high-cost metro propped up by employment from tech, financial services, and retail. Both the FHA and FHFA loan limits have increased there from $517,500 in 2015 to $540,500 in 2016, a 4% increase over last year. Since the area’s current median new home price of $462,246 falls easily under the new limit, it seems reasonable to expect sales to increase in the New Year, especially when potential buyers currently considering homeownership are provided additional motivation by the expected increase in interest rates.
The new loan limits are unlikely to be much of a game changer in the San Diego market, says Peter Dennehy, Meyers Research’s San Diego consultant, since home price appreciation already outpaces the FHA jump. The biggest winners of the FHA change will be townhome communities and locations with more affordable single-family detached products that fall into the expanded FHA guidelines, i.e.: the neighborhoods of Chula Vista, East County, and Highway 78 area.
Higher FHA loan limits, combined with marginally higher mortgage rates and continued economic recovery creates a strong platform both potential first-time buyers and those with less-than-perfect credit scores to finally make the move towards homeownership in 2016. Our Chief Economist, Kevin Gillen, explains “since the consensus expectation is for several more rate increases in 2016, this should provide additional motivation to these marginal but potential homeowners.”
 Mortgages to be acquired by Fannie Mae and Freddie Mac
If you have any questions, please contact Ali Wolf, Manager Housing Economics.