Are We Hurting Homeowners, Or Are We Helping Them?

This week brought us a bunch of economic news–but none of it did much to calm fears that the U.S. may be sliding into a recession.

A brief recap:

• On Wednesday, the Federal Reserve’s Beige Book showed that inflation and low consumer confidence are slowing the economy. Big item retail sales fell in the first two months of 2008. Regional banks
  gave out less loans.

• The number of homes entering into foreclosure reached the highest level on record in the fourth quarter, according to the Mortgage Bankers Association.

• And homeowners’ share of home equity dropped to its lowest point since World War II.

However, this week also included some potentially good news–the Federal Housing Administration finally announcing the new regional loan limits that the economic stimulus plan allows.

As we discussed yesterday, the FHA early Thursday posted the new limits for the state of California; by the end of the day, its site included all the new limits for the U.S.

The new maximum is $729,750, which we knew; but we now know what areas–mostly metro areas and much of costly Southern California–will get the highest caps.

The move was made to reinvigorate the high-end housing market, allowing the FHA, Freddie Mac and Fannie Mae to back or buy bigger loans and hopefully spur home sales and refinancings in pricey markets.

The new limits are in effect until Dec. 31 of this year; talk has already begun about extending them longer. With pretty much no one predicting that the housing market is going to turn around until at least halfway through this year, that’s not an impossible notion.

But is it a good one? On one hand, we need to get rid of some of the housing inventory, which means somehow making loans easier to get and avoiding more foreclosures, which would add new homes to the market.

So maybe jumbo loans–which are expensive and increasingly difficult to get–are a good place to start. In housing markets like Southern California, the previous FHA limit was too low to really do much for even moderate home buyers.

The Los Angeles-Long Beach-Santa Ana area median single-family home sales price was $593,000 in the fourth quarter of 2007, according to the National Association of Realtors–which is $230,210 greater than the previous FHA high-cost area $362,790 limit.

So a number of people buying average, everyday $593,000 homes in L.A. are likely to benefit from the FHA increase, which now allows the agency to back loans up to the $729,750 maximum.

But, then again, just because the median home price in an area is high, it doesn’t mean local buyers can afford to buy a home at the typical price. In places like California, home prices swelled to unbelievable levels during the boom. Cashing out, trading up and taking out major loans kept the market rolling along–until the housing slump hit. Those options have all but disappeared.

Qualifying homeowners for pricey properties they maybe couldn’t afford is a big part of what got us into this situation. As home prices swelled during the boom, people bought and borrowed from the equity in their costly homes–and many of them are now facing default or foreclosure.

So focusing on the high-end housing market maybe isn’t the best place to first attack in our ongoing attempt to cut the amount of for-sale housing. It’s possible the best option is to wait a bit longer for home prices to fall to more reasonable, affordable levels in high-cost areas like Southern California.

Or are troubled homeowners in overpriced markets–despite whether or not that market needs a correction–just getting a helping hand with these new loan limits?

What do you think? Talk to us–post your thoughts below …