NAR Home Price Survey Raises Big Questions About the Jumbo Market

The National Association of Realtors released its quarterly home price survey today–and the trade group says median home prices dropped in two-thirds of the cities it surveyed.

• Median
  prices for pre-existing single-family homes fell in 100 of 149
  metropolitan areas in the first quarter, NAR said; 48 urban
  areas posted price gains.

• One lone metropolitan area had no change.

• The national median home price also fell, dropping 7.7. percent from the January to March 2007 period to $196,300. The former median sales price was $212,600.

NAR has been characteristically optimistic as of late about the housing market improving–let’s face it, the group is always pretty upbeat (it doesn’t really benefit real estate agents to have the media and general public convinced housing is in an unending downturn and it isn’t a good time to either sell or buy a house).

But the first quarter results are anything but cheery. What gives?

According to NAR Chief Economist Lawrence Yun, who always offers a tender word to accompany dour housing news, jumbo loan issues are to blame for the numbers.

As mortgage defaults rose, banks panicked and credit became harder to get; for high-end, expensive properties in costly markets, it became really harder to get.

"These are highly unusual
results because there were very few jumbo loan originations in the
latest quarter, so sales are much slower in high-cost areas, and at the
same time foreclosures related to subprime mortgages rose," Yun said.

Well. OK. We’ll agree, that could be an issue. Congress tried to reinvigorate that very market by raising FHA, Fannie Mae and Freddie Mac loan limits in March. Freddie Mac and Fannie Mae’s shot up from a $417,000 maximum to $729,750.

That meant more people qualified–but it didn’t mean the loans were cheaper.

Jumbo loans
rates used to be about no more than 0.25 percentage point higher than
conforming-loan rates. However, the difference swelled to more than a percentage point as the credit fallout continued because investors were worried about buying nonguaranteed loans.

The government-backed agencies’ new, increased involvement in the jumbo market should have helped–but the San Francisco Chronicle reported today that the rates just now are beginning to come down.

Last week, many lenders cut their jumbo-conforming loans rates by a half a percentage point, which makes the loans as affordable as standard confirming loans below $417,000, according to the Chronicle.

So it’s possible Yun and NAR are right: The jumbo market just didn’t get the shot in the arm it had expected–at least not in the first quarter.

Yun also said that more than half of all mortgage foreclosures involved subprime mortgages, and severe price drops are happening mostly in areas where subprime loans had been frequently issued.

And it’s true, that does describe many jumbo loan markets in the U.S.–California, Las Vegas and more. It’s also true that we know we need to start moving homes in stagnant markets such as those to reduce the national housing supply, reignite demand and kick-start residential building again.

But therein lies our problem: Because although those Fannie- and Freddie-backed jumbo loans with the higher limits can potentially help more people, they’re not necessarily easier to qualify for.

As the Chronicle points out, Fannie Mae and Freddie Mac
generally require better credit scores, more strict income documentation,
larger down payments and lower debt-to-income ratios on loans from
$417,000 to $729,750. Those borrowers who had subprime loans before just may not make the cut.

And if a borrower with good credit owns a few investment properties–which some do because of jumbo market gains during the real estate boom–the person may not get funding at all.

Freddie Mac issued a bulletin on April 22 to lenders that said it planned to restrict financing to second-home and investment real estate buyers who have "individual or joint ownership" interests in more than one property after August 8, the Washington Post said.

Second-home buyers won’t qualify for new Freddie Mac mortgages if they have ownership interest in more than four properties (unless they’re paid off). Freddie Mac used to allow investors to own up to 10 rental properties carrying mortgages.

So we wonder: Will the lower jumbo loan rates really help the second quarter results?

Or will the jumbo market remain sluggish–and as Yun said, affect home prices–because it’s still hard to qualify for a government-backed loan? Having more money available isn’t much help if most people can’t get it.

What do you think?