Rising interest rates are discouraging upper-income consumers from trading up to bigger and better homes. As a result, volume in jumbo mortgages is down.
Furthermore, the two largest markets for jumbos - loans for more than $203,150 - are California and the Northeast, and they have been slow to recover from recessions.
Housing prices in those two areas are still depressed and consumers there are not borrowing for purchases or refinancing. Rising rates have made the market for jumbos even worse.
Larry Swedroe, vice chairman of Residential Service Corp. of America, Clayton, Mo., said the popularity of jumbo mortgages had declined across the country.
He said people now are reluctant to move up to a larger home as they would have in better times, causing housing gridlock. They are locked into a low rate and are less likely to trade up, he said. The decline in property values in California and the Northeast means they would lose money by selling or refinancing. Mr. Swedroe said those homeowners would likely turn to home equity loans to build additions to existing homes.
"Those markets have been weaker for income and housing costs," Mr. Swedroe said. The hottest markets today are the Midwest, Colorado, Utah, and Washington, what he calls "low-price states," thus decreasing the demand for jumbos.
Besides the shrinking demand, mortgage banks are facing new rivalry in the jumbo market.
In 1993, mortgage banks were doing better than portfolio lenders, Mr. Swedroe said, because portfolio products were too risky.
That has now changed. Banks and thrifts are focusing on consumers, and see potential cross-selling in mortgage customers.
"They are hungry," Mr. Swedroe said of the new competition. "A jumbo mortgage is more attractive because it gives them an upscale consumer." Holding loans with high interest, especially jumbos, is now favorable for banks and thrifts.
First-time home buyers have been the majority of the marketplace since 1993. Despite rising rates, the first-time market is still strong. Mr. Swedroe said he doesn't expect the mix to change without a significant drop in interest rates.
"Wealthier consumers are more financially savvy, so they will try to play the market and wait it out," said Denise Corcoran, vice president at Chase Personal Financial Services.
She said the shrinking market is affecting sales of jumbos and the interest rates are exacerbating the situation.
"Since rates are going up, the expected purchase market is not there," she said.