Will New Loan Limits Cause Home Values to Drop?

The short answer is, “No.”

The loan limits were raised shortly after the housing market crashed as a way to enable and encourage buyers to buy homes by offering them government-backed loan options such as FHA which only requires a 3.5% downpayment. These loan had previously been unavailable to buyers in higher-priced areas such as the Washington,  DC Metro area because the average home was priced higher than the loan limits on government-backed loans.

Prior to the crash, government-backed loan limits in this area were $417,000. The average single family home in this area cost far more than that so even those buyers that wanted to buy were not able to because there were very few loans available to them. In early 2008, the loan limits in this area were temporarily raised to $729,750. This higher limit was extended a couple of times to help buyers and thus help the housing market.

On October 1, 2011, the temporary loan limit increase expired because it was felt that the home values had decreased enough that the higher loan limits were no longer needed. Loan limits in our area decreased to $625,500 which is still higher than the original $417,000. The median price for all homes sold in September, 2011, which includes condos and townhouses, was $424,000. Clearly, the new, lower, loan limit will not affect this scenario.

The average sold price for a single family home in this area in September, 2011 was $681,209. I prefer median prices over average prices because the very expensive homes can sometimes skew the figures. For instance, 72 of the 608 single family homes sold in September were over $1M, and one of those was over $5M. The median price for a single family home is probably closer to $550,000, but I don’t have the statistics on that figure. The new loan limits might affect those buyers that are buying an above-average priced home, but usually those buyers have at least a 20% downpayment and wouldn’t need the government-backed loans with lower downpayment requirements.

Bottom line? The lower loan limits are a result of lower home values, not a cause of lower home values. I’m sure some buyers that were settling around October 1 had to scramble if they were not anticipating the expiration of the loan limits, but the new $625,500 loan limit should not have an adverse affect on home values in our area in the long run.