conforming loan limit and rate spreads

[longcat]

With all the talk about the treasury potentially intervening to drive down conforming loan rates for new loans down to 4.5% which will doubtless widen the already large rate spread between conforming and jumbo, will the Houston RE market for houses above say 500-600k (conforming limit + 20-30% down) start to slow down even further? A lot of buyer's wealth in the form of stock options in all the energy companies and other stock market investments has also vanished in the past few months. Any thoughts on the implications for inner loop and other high end areas?

[Angostura]

Just did a quick check, comparing two homes: one $500k, and another $550k, both with an 80% LTV.. The first had P&I of $2087 (4.75%, paying about 0.7 pts), the second had P&I of $2681 (6.15%, paying 1 pt). That's 30% more monthly payment for 10% more house.

[RedScare]

It probably depends on whether they extend the temporary bump in the maximum size of conforming loans past December 31, though I am not sure that the Houston area saw a bump (due to our low median home price). I would expect some softness in jumbo loan home sales, but at the same time, I never underestimate the need of the wealthy...or the upper middle class, for that matter...to stroke their egos with large homes. I would think that the bigger impacts would come from the ability to qualify for the loans, rather than the interest rate. 6.15% is still pretty low.

The other big impact would be the overall mood of potential buyers. If the recession feels like it is hitting close to home, people will not buy. Likewise, if the feeling is that prices are dropping in Houston, buyers will wait for them to drop further. A 4.5% loan package made available to conforming loan buyers may make the jumbo market LOOK anemic in comparison, but it would likely not be because of the loan program itself.

[Angostura]

6.15% (@ 1 pt) was a robo-quote from today based on an 800 FICO score. YMMV.

Houston apparently did NOT get a bump (see here). Limit is $417k, so at 80% LTV, that'd be $521,250 sell price.

[Angostura]

Attached is some more rigorous data from mtgprofessor.com.

The spread between conforming and non-conforming loan rates have been creeping up over the last 12 months from under 1% this time last year to the better part of 3% as of last week.

I did a quick search on HAR comparing the number of closings in 5 inner loop zip codes in the range between $600,000 and $800,000 in the last 6 months and in the prior 6 months. In 4 of the 5 zip codes, there were fewer closings in this price range:

77006: -25%

77008: -47%

77019: -50%

77027: flat

77098: -44%

However, the data set is pretty thin, a total of 88 closing in the last 12 months, and there's no way to say whether the drop-off is due to the rate spread or other factors.

[RedScare]

I've got two numers that will answer your question better than the professors charts...533,000 and $25. The BLS just reported that the workforce lost 533,000 jobs in November, the biggest loss in 34 years. The economists were predicting a 350,000 job loss. And, Merrill Lynch is predicting oil will drop to $25 per barrell by early 2009. The economy is in freefall, and Houston will catch up to the rest of the country if $25 crude materializes. I don't care what the interest rate is, that won't help home sales.

[Angostura]

Is that the same Merril Lynch that predicted $150 oil in mid-October? Not that they may not be right this time, but I take these predictions with a grain of salt.

That said, there certainly won't be many stock-option windfalls this year, espcially in the O&G industry, and that will have at least as big an effect as the conforming/non-conforming rate spread.

[longcat]

Just did a quick check, comparing two homes: one $500k, and another $550k, both with an 80% LTV.. The first had P&I of $2087 (4.75%, paying about 0.7 pts), the second had P&I of $2681 (6.15%, paying 1 pt). That's 30% more monthly payment for 10% more house.

This creates a really interesting discontinuity in the market with such a large step change in monthly "cost" to a buyer between 2 relatively close prices. I hadn't realized the spread was 3% in some cases from your other post, and that is before the impact of any further treasury actions to bring the conforming rate down. Red may be right in that the upper upper end might not be as affected (vanity, all cash...etc), but below that, who knows. I'd really hate to be selling a 550k house right now.

[longcat]

WSJ had an interesting article this morning discussing the increasing default rate on jumbos. One of the reasons they cited was the inability to refinance jumbos because of the blow out in spreads between conforming and nonconforming (which they peg at 1.53% as of last week):

WSJ article (probably $)

I myself have seen (just anecdotally though) a slowdown in sales of houses in my neighborhood which are definitely jumbo territory. The scariest part of the article is the chart which shows the prime jumbo loan 90 day delinquency rate somewhere between 16 and 17% for Florida. That's a lot of "to be foreclosed" condos in Miami for sure!