Though more first-time buyers appear to have entered the housing market, a virtual standstill persists at the top of the ladder, the "move-up" market — people who sell one home to buy a larger, more expensive one.
Sales in this sector have been stymied by sellers' inability to attract buyers who can obtain financing at rates even close to what first-timers are paying. Even if someone manages to hook a buyer who qualifies for a mortgage under today's strict underwriting guidelines, the seller is probably going to have to invest much of the profits in his next home if he hopes to move on.
This is a tale of two markets, where the dividing line is $417,000, the conforming-loan limit. Below that amount, Fannie Mae and Freddie Mac provide the grease that keeps money flowing into housing. But above the ceiling, in the jumbo loan market, no government underpinning exists in most places. As a result, that part of the market is in shambles.
"If you ever wondered what the mortgage market would look like without government support, that's what we have today in the jumbo market," said Howard Glaser, a mortgage industry consultant. "And it's not just the high end of the market that's impacted. It affects the market all the way down the ladder."
Lawmakers have temporarily raised the Fannie-Freddie loan limit to $729,750 in 76 of the nation's 3,300 counties. (The ceiling in high-cost markets is scheduled to fall back to $625,000 on Jan. 1 unless extended by Congress.) The limit falls between $417,000 and $729,750 in 600 other places.
The Consumer Mortgage Coalition, a lender trade group, urged the Federal Housing Finance Agency to let Fannie and Freddie buy loans of up to $1 million in a letter to the regulator this week.
In the jumbo sector, there is hardly any securitization, and lenders are increasingly reluctant to make jumbo loans they cannot sell, at least at rates borrowers consider acceptable. Lawrence Yun, the chief economist at the National Association of Realtors, said the difference in rates between conforming and jumbo loans has jumped from 1.4 percentage point in 2005 to 3.9 points this March.
"Even when people have the capacity to buy, they're not, because they don't want to pay the high jumbo rate," he said.
When owners cannot sell their houses and move up to the next rung on the ladder, those below cannot move up either, so the market becomes clogged.
The Realtors said half of all existing-home sales in March were to people who had never owned homes before. But this "doesn't mean first-time buyers are rushing to buy," said David Lereah, the Realtors' former chief economist. "It just means that there are so few trade-up sales that the first-time buyer share is automatically going to go up."
David Adamo, the president of Luxury Mortgage in Stamford, Conn., said that as recently as a year ago someone seeking a $1 million loan could get by with a 5% down payment as long as the borrower had a 620 FICO score and enough money in the bank to cover two months' principal, interest, taxes and insurance. Bonuses could be counted as income.
Now, that same borrower would need a 700 FICO score; income of at least $250,000; and six months' PITI payments, about $50,000, in reserve. Bonuses no longer count.
In many places, people who need jumbo loans are what Adamo calls "Henrys" — "high earning but not rich yet" — households making $250,000 to $500,000. "Many people believe the jumbo market is for the very rich," Yun said. "But in many areas of the country, middle-class families need these loans to buy a median-priced home."