RealEstateEconomyWatch.com

Over the past two weeks inventories and days on market for listings over $500,000 have soared at the same time that the reduction in loan limits that took effect on October 1 starts to bite in luxury markets across the nation.

Maximum loan limits in high value markets, which had been $729,750 since July 2007 fell to $625,500.  The reduction affected both the maximum for loans purchased by Fannie Mae and Freddie Mac as well as the maximum size of loans that can qualify for Federal Housing Administration (FHA) guaranteed financing.

The Institute for Luxury Home Marketing (ILHM) reports that both the total national inventory of listings priced above $500,000 and the median national days on market for luxury homes have increased 18 percent over the past two weeks to 178 days.  The unusual fall increase in inventory reflects a near doubling in new listings and a 24 percent decline in absorption.

The full impact of the lowering of maximum limits on prices may be less obvious because the upper end price tiers have been adjusting their ask prices since the early spring in anticipation of the loan limit changes, according to Altos Research, which prepares the ILMI report.

In a survey of more than 1300 Realtors released last week, the National Association of Realtors found that nearly half of those representing buyers reported a negative impact on their clients.  Some 52 percent said that the lower limits forced their clients to come up with a larger down payment; 32 percent looked for a lower priced home; and 21 percent paid an average of 79 basis points in higher mortgage costs.  Nearly one out of eight, 16 percent, quit looking for a home altogether. The minimum size for jumbo loans (i.e., loans not eligible for FHA, Fannie Mae, or Freddie Mac financing) may also have been lowered forcing many prospective buyers to increase their down payments and/or pay higher mortgage rates.  Some 12 percent of Realtors representing sellers said the lower limits cost them the sale and 31 percent said they were forced to reduce the sale prices in order to make the sale work.

Shifting from a conforming to a jumbo loan has several important ramifications for buyers.  Buyers who were previously eligible for the high loan limits will now have to qualify using jumbo product guidelines and rates. This will typically mean a higher rate, at least a 20 percent down payment and tougher qualifying criteria. The biggest issue for many buyers with the jumbo loans available today is that they require the home buyer to have large reserves in the bank after closing over and above the cost to purchase their home. In addition to needing more for a down payment because of the lower loan to value ratio, they will have to have greater overall assets verified to meet the reserve requirements. Some lenders are requiring as much as a 10 percent of the loan amount in reserve with all the funds being liquid.