Some jumbo-sized mortgage blues

I have a question. I understand that a conforming loan nation-wide is $417,000 and in Massachusetts a jumbo starts at $465,750 (for certain cities). But is anything below $465,750 considered conforming in those cities? Or is considered something in between conforming and jumbo and higher rates apply?

Scott, if you put 20% down, the limit of $465,750 means you are buying a house for $582,187. While it may not get you your "Cape in Wellesley" (arguably one of the top towns in Massachusetts) it will get you a lot of house.

And BTW... there are 12 homes (some even capes!) in Wellesley listed for under $600k.

Yeah, it must be the loan that's the problem. Couldn't possibly be that home prices here are absurd. And Barney Frank is exactly who we need to fix the "problem." His relentless support of Fannie Mae and Freddie Mac over the years when others were calling for reform is largely responsible for the fabulous situation we're in now.

Explain to me again why we need to subsidize the purchase of luxury homes for the affluent?

So-called conforming jumbos will never be popular with investors--they weren't last year--because they do, in fact, have a different risk profile than real conforming loans. So it's up to the taxpayer to once again foot the bill and take the risk.

It was funny to read Barney Frank say that a conforming loan wasn't enough to buy a middle-class home in Quincy, where the median home price is in the 3's. It's also funny that, even in the midst of a collapse of a credit bubble, people still can't understand that overly generous lending is the reason why home prices are high to begin with.

The ratio of median home price to median income in Oklahoma City is $110K/$48K = 2-to-1. In Barney Frank's home town of Newton MA, this ratio is $658K/$132K = 5-to-1 (figures from CNN Money). Home prices in Newton are obviously much too expensive measured in any reasonable fundamentals: incomes, cost/rent ratio, etc.

Bubble-level home prices in Newton and elsewhere will fall back to earth just as surely as did the prices of tulip bulbs and pets.com stock.

It is obscene to force taxpayers to subsidize low mortgage rates in a futile and desperate attempt to prop up bubble level home prices. Frank's tinkering with interest rates just prolongs this home price Ponzi scheme and will make the painful correction deeper and last longer.

Home prices in Newton are obviously much too expensive measured in any reasonable fundamentals: incomes, cost/rent ratio, etc.

We talk a lot on this blog about price/income, but price/rent may prove more important.

There's a post up at Calculated Risk now about the large percentage of home sales now driven by "investors" or "speculators," depending on what you want to call them. At least some foreclosed or distressed homes are now selling at prices that make them cash-flow positive for investors. This puts a floor on the home prices. Now, these investors may be overpaying right now, and rents may drop, but eventually, that principle holds. Once a home is selling at a price where it can be rent out for profit, you now have a pool of willing buyers that puts a stop to further declines.

Here's the rub. Lower priced homes in places like CA reached that point relatively quickly. But for higher priced homes in areas like Newton, prices will have to fall much, much further before the reach the cash flow floor.

Which makes wasting scarce taxpayer rescue dollars on jumbos all the stupider.

What sense does it make to compare home prices in Oklahoma City with Newton? Why not look at real estate in Rwanda or Vietnam? Part of the reason housing is so expensive in MA is surely that there is not enough of it.

So what is the formula used to determine the jumbo limit? What are you suggesting as an alternative? Are you saying there shouldn't be a limit, or that the limit should be by square feet, rather than dollar amount? I'm confused what the complaint is here.

Get your nose out of the air. Any fool who can afford the payments
on a 500K mortgage is in a distinct minority in this country. If you're
doing so well , here's a news flash. SAVE YOUR MONEY. If you're
in such a hurry to flash your cash, do as your peers have recently
and throw it out the window. Please don't ask those of us who have
been fiscally conservative to bail out your lifestyle.

Part of the reason housing is so expensive in MA is surely that there is not enough of it.

Then why aren't high prices reflected in rental costs? They aren't -- it's still cheaper by about a factor of 2-to-1 to rent than buy. I see this in my own neighborhood: two homes priced at over $2 million failed to sell last fall, so they were rented for $4K/month. A buyer would have to spend about $12K/month for those places. The story is the same for home prices in the $500K-$1M range, only the cost/rent is a little less than 2-to-1 in this range.

The only reason why housing became so expensive in MA and elsewhere on the coasts is because people bought into the idea that prices would never fall. Now they are, and we're witnessing a host of desperate and futile attempts to staunch the bleeding in the aftermath of a bubble. It'll never work.

What sane person would pay $2 million dollars for a house, at a carrying cost of $12K/month, that they could rent for $4K/month?!

Why should Barney Frank force taxpayers to subsidize buyers who can rent the same places for about half the price? This absurd question answers itself.

Can someone please explain why some people think that tax payers are subsidizing or would be subsidizing purchases of expensive homes???
People who buy those are usually more economically stable, usually put down 20% and make more money and hence pay more in taxes then the ones buying cheaper housing. The only reason they pay more in interest because it's harder to sell jumbo loans on a secondary market and not because those people are high risk buyers!!! so bringing rates on those loans to a lower level would have nothing to do with subsidizing it.

Kai,
I agree, that's a weird comparison. Prices vary quite a bit depending on location, even within towns sometimes.

When I bought a house in a town very near Boston in 1994 for $220,000, my dad who lives in Missouri screamed with laughter, "That's outrageous. House's are so much lower out here!".
My friend in San Francisco also screamed it was an outrage. "Houses are sooooo much more money out here! You are soooo lucky!"

Marcus,

I agree. I have absolutely no interest in helping the affluent get even more than they already have on the backs of the rest of us. They don't need help. But they will gladly take it if we give it to them.

Can someone please explain why some people think that tax payers are subsidizing or would be subsidizing purchases of expensive homes?

Because the GSEs, which are underwritten and recently bailed out wholesale by the taxpayers, spend money to bid down the yields of bonds based on jumbo mortgages. Raising the jumbo size means that the GSEs have to spend money to ensure that the spreads on the jumbos produce the desired yields.

Low interest rates aren't free, and we haven't even discussed the risk factors of the GSEs buying up jumbo mortgage debt at bubble prices.

Big Paulie-
What makes you assume that people are fools who have a large mortgage, and what makes you think that they are a distinct minority? Painting with a broad brush I see.. . . .

We talk a lot on this blog about price/income, but price/rent may prove more important. There's a post up at Calculated Risk now about the large percentage of home sales now driven by "investors" or "speculators." ... Once a home is selling at a price where it can be rent out for profit, you now have a pool of willing buyers that puts a stop to further declines.

There's a CR post up now about declining rents caused by the recession and loss of jobs. The realities of declining rents and deflationary pressures on home prices makes increasing the jumbo limits an even crazier idea.

The NAR is one of Barney Frank's largest political donors, after the banks. They're the ones pushing these dumb taxpayer bailout plans through the politicians they bankroll, like Frank and Schumer.

While rates on conforming loans, at or below $417,000, have fallen to 5 percent, rates on jumbo mortgages are in the 7 percent range

The reason jumbo mortgages are 200-300 bps above conforming mortgages is because the market is pricing in the real risk that people with "nonconforming" mortgages are buying at bubble levels and will default on their loans when prices fall. The jumbo market has therefore frozen up. The traditional risk premium for jumbos is around 50 bps. After the credit crisis and bailouts, another word for "nonconforming" or "jumbo" mortgage is simply, "a mortgage that must be underwritten by a private, non-GSE entity."

One can debate whether the jumbo market is frozen because people reasonably expect bubble-level home prices to fall back to earth and therefore do not wish to lend in this market without a large (200-300 bp) risk premium, or because the non-GSE lenders, having already lost so much capital, are insolvent and therefore unable to lend .

Either way, Frank's plan to increase the size of conforming mortgages puts taxpayer money and risk on the table to buy up mortgages that the market believes is highly risky and is unable to pay for because of the losses caused by the mispricing of previously purchased mortgages. This plan is doomed to fail because people will not buy depreciating assets that can be rented for a fraction of their purchase price. The plan's only benefit will be to provide temporary relief to Frank's donors, the banks, whose need the cash flow while home prices remain elevated, and the NAR, whose members need the cash flow from continued sales.

The plan cannot help home owners, whose prices cannot be artificially supported by government shenanigans with mortgage paper, and is outright harmful both to new buyers lured into the Ponzi scheme by artificially lower rates as prices fall, and to taxpayers who need their money spent on worthwhile stimulus programs and cannot afford to have it wasted during an economic crisis.

Sunny, you make me worry whether I have developed an alternate personality, and am posting under it!

Although I am as far from a wingnut as possible, I am beginning to wonder whether we'd be better off without Frank in Congress. Not only his public actions, but his published email exchange with the blogger behind Paper Economy casts significant doubt on his understanding of the issues.

I have to admit, reading Sunny Jim's posts here without seeing the handle I thought it was Marcus.

Kai #7 - we have discussed that issue to death on this blog, and provided a million reasons why it is not true. To reiterate the basics - it is the ratio of salary/price or price/rent that matters - both of which implicitly normalize for the differences between Boston and Oklahoma, let alone Rwanda. Secondly, supply is not nearly that constrained here, though it is constrained. And finally, constrained supply and higher incomes have not stopped Mass from falling in line with fundamentals before - look at what happened in the fall of house prices from 1989-1995 in Boston. Including wealthy towns and places like central boston where "they aren't making more land" (Though amazing how many units came on despite that. I bet somebody said that on Manhattan 100 years ago, yet there are still cranes putting up buildings every time I go...

Blarney Frank is a cancer for the housing market...

"1.What sense does it make to compare home prices in Oklahoma City with Newton? "
Obviously, Location, Location, Location is important. What will be constant though is the price to income or price vs rental price. There are market fundamentals that set the amount people can pay. The Location factor typically impact the amount people want to pay, not what they can pay. The 'W' towns are desirable places to live due to proximity to Boston jobs and nice schools. Unless you have the steady income to support paying 6X income, which recent headlines suggest employment will be far from steady for many in Mass.
Yes, gravity will be returning to home prices, sorry to say.

What's a "W" town? Where George Bush would live?

The "W" towns are Weston, Wellesley, Winchester, Waban and Wayland. All nice, top of the line communities, with pricey housing...

sorry forgot Westwood...

Sally - generally used term for high rent towns west of Boston - Wellesley Weston, Lexington, Lincoln, Concord, Newton, Wayland, Sudbury

Why W town instead of L town? Got me. Maybe because the Ws are on the pike..