patrick.net

Good question.

I guess it really depends on how motivated the high-end is to sell. If they don't lower their price targets to account for the lost buying power, this supply will not hit the mid-range -- time on market will increase but the downgrade from high to mid-range supply will not happen.

That's a good question. Here are some of my thoughts:

1. The direct domino scenario could happen where each house/neighborhood takes a fairly equal and proportional haircut (with a loan on $729 > $679> $629 > $579 > $529 > $479 > $429K > $379K > $329K > $279K etc...). This would require sellers to recognize what is happening and price accordingly. I don't know how far down the prices will ripple, though.

2. Prices on the lower tier homes (with loans) that are still conforming (under $600K in your example) may firm up and could even increase (from a lower price upto the $600K loan limit). This would be due to the original buyer demand in that tier combined with the buyer demand from the higher end tier entering that market. For example look at the numbers above. $279K to $600K may have the same or likely more buyer demand than they do now (because the $600K to $729K currently conforming buyers will be eventually look for a lower priced house).

3. I don't know that the $800K loan (or $729K+) would be affected at all. This is due to the fact that those buyers aren't using conventional loans now. Those buyers are already making due. They have already found market equilibrium and will likely sell at the same rate they do now.

Alright, thinking it through, my conclusions are that houses with $729K+ loans would stay around the same. $600K-$729K loans will eventually fall under $600K, but only after sellers get frustrated with their houses sitting for along time. It will likely take years for them to recognize and accept it. Houses in the current $550K-$600K range will be very competitive along with the $600K to $729K range that drops their prices to get into the $550K-$600K range. They very well might get bid up past what would be the $600K loan limit with extra cash being the difference between buyers and bidders. $500-550K may have some increased demand, but the $400K's or so may not really be affected. The ripple may not go down that far.

Those are my thoughts... but who knows, you know?

Your statement "nicer" starter homes is indicitive of the real problem...and why prices HAVE to drop when the conforming limit is reduced.

Simply put, most people that purchase a home STILL stretch to afford the most house they can for the loans they can obtain. And by "most house" I mean modern upgraded granite stainless blah blah blah.

So, say a potential buyer has $100K cash saved up and an annual family income of $120K.

Its my assertion that this buyer(in a vacumn) will purchase a $500K house. They will put $100K down(or worse yet, under $20K down), and borrow the closing costs etc from family members or some other loan or something. Reasonably, they should purchase something more in the neighborhood of $350K or whatever...put $70K down, pay whatever misc moving, closing, costs, etc, and have a reasonable amount left in the bank.

But people are retarded and buy on emotion.

So anyway...I just read SF Ace's response and he is probably right. Sales won't really be affected. People will just go forth with something even more retarded. Emotion LDO.

dodgerfanjohn says

Reasonably, they should purchase something more in the neighborhood of $350K or whatever…put $70K down, pay whatever misc moving, closing, costs, etc, and have a reasonable amount left in the bank.

Unfortunately, Dodgerfanjohn, inventory in this area for $350k homes is nearly non-existent, so you are correct, prices should fall, which would take a few more years, I think, and we also need something to live in sooner rather than later! We could move 30 miles north, but the gas & commuting costs are prohibitive.

I think the loan limit should be 250K and that's being generous.
If you can afford not only the down payment on a 600K+ house, but the monthly payments too.
Then it seems to me, you're quite capable of swinging your way to a 600K house, starting from a 200K starter house. Like it always was. Over 250K is hardly a "Starter house" and where ever it is, that place must have its head so far up its arse, and has lost grasp of reality eons ago.

dodgerfanjohn says

So, say a potential buyer has $100K cash saved up and an annual family income of $120K.

Its my assertion that this buyer(in a vacumn) will purchase a $500K house.

Wow you just described my situation yet I have never considered a 500k house. I am looking in the "good enough for now range" which in Phoenix is the mid to high 100 range (varies by area). I played the "buy as much as you can afford" thing and it didn't work out so well, I'm seeing people buying new builds here for near 100% markup over the same plan as a foreclosure. My wife and I assume they are new to the area. How can anyone take on a 30 year mortgage with what has happened to the job market in the last 5 years? I'm scared to death of long term debt now.

The thing is that it isn't always to predict what may happen to higher-tier prices when you move an arbitrary cut-off point. Basically, you are trying to predict what human beings are going to do. And since we all know that most, if not all, people fail to act rationally, you can see the difficulty...

My guess if that most people will want to get the lowest rate, so it comes down to how much down payment they are comfortable putting down. Are buyers confident enough in the current economy to put down an extra 100k to get the lower rate? Do they settle for less house? Do they pay $200 more per month for the house they want? Possibly.

It's also possible that many buyers will wait and see what the effect of a change in conforming limits has on prices. This will sap demand, and drive prices lower. Adding more stress to an already distressed market will have a predictable effect on prices. What is difficult is predicting the magnitude of the effect. I think we can expect sales volumes to increase for high tier homes prior to the change in conforming limits, and we will see a drop in volume after. This pulling forward of sales will result in lower demand 6 months after the limit has fallen and drag prices further down.

tenant in foreclosed house says

dodgerfanjohn says

Reasonably, they should purchase something more in the neighborhood of $350K or whatever…put $70K down, pay whatever misc moving, closing, costs, etc, and have a reasonable amount left in the bank.

Unfortunately, Dodgerfanjohn, inventory in this area for $350k homes is nearly non-existent, so you are correct, prices should fall, which would take a few more years, I think, and we also need something to live in sooner rather than later! We could move 30 miles north, but the gas & commuting costs are prohibitive.

Then you should rent for the time being.

It would be useful to look at some data on the typical borrowing habits of buyers at this level. I've seen the recent numbers on % of home sales that are cash, gov't backed, and conventional; and I've also seen info on the typical down payments of the gov't backed loans vs conventional. But I haven't seen it broken down anywhere in a way that would show if buyers in this tier are being more or less responsible than the buyers at lower tiers. Does anybody have links to where this could be found?

Just to take a guess, I'd assume that buyers in the upper tiers are still stretching their limits and coming in with the minimum downpayments like they did during the bubble. And if that's the case, it also means that significant amount of borrowers at that level are all of the sudden going to have a reduced buying power. I think that would have to push prices down.

"Prices did not rise when the conforming limit was raised, or?"

Instead, prices dropped slower because the super-conforming limit was working to prop up the market.

Most housing purchases are largely based on "can I afford the monthly payment?" rather than "is this a good price for this house?" If the government steps out of a segment of lending, the private market will step in, but the private market will want more return to compensate for the risk. Monthly payments will go up, so all else equal, prices should drop gradually to compensate.

Housing prices are sticky, so this doesn't happen all at once.

I agree with tenouncetrout that the conforming limit should be lower, possibly even lower than $417K. There is no reason to be subsidizing home loans for people who are far into the upper income brackets.