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A Jumbo Problem in California

Posted by: Chris Palmeri on January 30, 2008

California’s once hot market continues to cool. The state’s association of Realtors reports that home sales were down 33% in December. Median homes prices fell a surprising 16% to $475,000.

The numbers illustrate that the slowdown that began in San Diego and in the once booming Inland Empire east of Los Angeles has now spread north. The median price was down 16.9% in Los Angeles; 18% in Santa Barbara County.

It also illustrates the impact the evaporation of credit in the jumbo loan market is having. Half of California’s home purchases are over the $417,000 conforming loan limit. Because Wall Street is no longer funding riskier loans, the spread spread between jumbo and conforming rates is three to four times greater than normal, the Realtors report.

Golden State Realtors got one big wish granted in the President’s stimulus package. The cut off for conforming mortgages will rise from $417,000 to $729,000 for one year.

Reader Comments

Jim D

January 30, 2008 4:07 PM

As galling as it is for me to admit, not all areas of the SF Bay are yet experiencing declines in prices.

Low end properties, and less desirable areas, are falling like a rock, with 25% or even 30% off 2005 prices not hard to find. Better areas, and more expensive properties, are still being bought for a little higher than 2006 prices.

So while things are turning, there's plenty of room for "it can't happen here" denial.

Brian R

January 31, 2008 10:32 PM

"The cut off for conforming mortgages will rise from $417,000 to $729,000 for one year." Chris, surely you jest. Yes, that is what the legislation says, but everybody knows that once the government increases the GSE's loan limit and the FHA's insurance limit, those limits ain't gonna be headin' down. To those in D.C., "temporary" means "just short of infinity."

Los Altos Dave

February 1, 2008 12:44 PM

Can the press stop making blanket statements about "real estate?" Or if one quotes a real estate source, include a disclosure like "Since real estate is local, not all real estate markets are behaving as above. Check your market out thoroughly before investing"

Mike P.

February 3, 2008 11:39 AM

The PRICE of a home is not the MORTGAGE you get when buying that home ("Half of California’s home purchases are over the $417,000 conforming loan limit"). The actual mortgage depends on your down payment (remember those?). For example, if a home costs $600,000, but I have $200,000 for a down payment, my mortgage is only $400,000 (which is below the conforming limit).

However, if you assume we're back in the bubblicious era, with a NINJA loan, "stated income" and no-money down, then my mortgage would be a jumbo on a $600,000 property.

See the difference? So that statement I quoted earlier is a litle misleading.

The important calculation is that your mortgage should be no more than 1/3 of your annual household income. With the median annual income hovering around $70k here in California, that would mean that most home buyers in the state should be taking on mortgages less than $210,000, which is well below the current conforming limit.

Using the same rule of thumb, you can see that raising the conforming loan limit from $417,000 to $725,000, would only help households making in the range of $140k-240k per year get non-jumbo loans.

Mike P.

February 5, 2008 4:28 PM

Sorry, I meant to write that your mortgage should be no more than 3x your annual household income, not 1/3. And this was meant as a rule of thumb.

Hopefully we'll get back to using traditional measures of affordability. The front-end and back-end ratios used by lenders take into account principle borrowed, mortgage rate, taxes, insurance and HOA (if any) as related to a borrowers annual income.

Regardless, raising the conforming loan limits will not help middle-class borrowers afford overpriced homes.

San Diego Buyer

February 16, 2008 3:58 PM

If the conforming loan limit has increased to $729,000 (which I don't dispute), why are all of the mortgage engines still identifying a $600,000 loan with 20% down as a "jumbo" mortgage for California? Have the lenders simply decided that they won't offer lower rates? Are we waiting for a trickle-down? Not enough web developers to change the HTML?

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BusinessWeek editors Chris Palmeri, Prashant Gopal and Peter Coy chronicle the highs and lows of the housing and mortgage markets on their Hot Property blog. In print and online, the Hot Property team first wrote about the potential downside of lenders pushing riskier, "option ARM" mortgages and the rise in mortgage fraud back in 2005—well ahead of many other media outlets. In 2008, Hot Property bloggers finished #1 in a ranking of the world's top 100 "most powerful property people" by the British real estate website Global edge. Hot Property was named among the 25 most influential real estate blogs of 2007 by Inman News.

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