Fannie Mae and Freddie Mac have announced that their loan limits for single-family homes will rise to $240,000 next year, from $227,150.
The 5.67% increase in the loan limit was announced last week, after the Federal Housing Finance Board said the average purchase price for a single- family home was up 5.2% from a year earlier, to $175,200. Both Fannie and Freddie use the October figure each year to adjust the maximum size of mortgage loans they buy. The slight difference in the percentage change reflects a change in methodology, a finance board spokesman said.
The hike in the loan limit is especially significant this year, because of the aversion to risk that has crept into the market amid the global economic crisis. Fannie Mae said the cost to the consumer of a jumbo loan- one that exceeds the loan limit-was $26,860 more than the cost of a slightly smaller conforming loan as of mid-November. That spread was up from only $12,490 in early August, reflecting the increased aversion on the part of investors to unguaranteed loans.
Mortgage Bankers Association of America economist Brian Carey attributed the increase in average home cost to three factors.
"We saw a lot of trade-up or repeat buyers this year purchasing homes at the upper end of the market, and expensive home sales can have a disproportionate effect on average housing prices," Mr. Carey said. "We had a wealth creation from the stock market that created the trade-up buyers, and the strong economy and employment growth created a lot of in-migration to hot areas that drove up housing prices."
Mr. Carey said the MBA is predicting a 8.7% decline in existing home sales next year.
"Just because limits went up, it doesn't translate into increased homebuyers. It will ultimately depend on the economy and the interest rates," Mr. Carey said.
Geoffrey Somes, economist at Fleet National Bank in Boston, said the increase is a technical adjustment.
"As housing prices went up, mortgages were being pushed out of the conforming range, which means less liquidity because you can't sell to Fannie or Freddie," Mr. Somes said. "The same thing is going on with tax indexes. You don't want to pay more if your salary is going up, and you don't want to pay a higher mortgage just because of housing inflation."
Mr. Somes said people on the cusp of conformity stand to benefit most from the loan limit increase.
"If you're already buying a very expensive or very cheap house, nothing is going to change for you," he said. "The Fed has shown a willingness to keep an easy monetary policy to keep us out of a recession, but there is a lot of uncertainty in the economy right now."
Fannie Mae said the 1999 limit increase will enable about 200,000 more families to have a Fannie Mae mortgage in the next year.