Buyer profligacy, banker minimal credit standards and government home ownership promotional policies combined to create the housing bubble that burst two years ago, devastating the economy. The housing sector wreckage remains a huge drag on the recovery with little that can be done to turn it around.
Indeed, arguably, little should be done as efforts to prop up prices only prevent the market corrections necessary for recovery. While prices have stabilized in many geographic areas, they remain shaky in others with more declines anticipated, especially as foreclosures put more homes on the market. Exacerbating the situation is the return to more conservative credit standards by banks and government housing agencies.
Banks are now requiring home buyers to prove (through documentation) enough income to support the mortgage payments of any structure requested, denying any mortgage amounts that would exceed prescribed limitations: monthly payments cannot not be greater than, for example, 30 percent of after tax take home pay. Further, the era of no down payment mortgages is over. Many banks require 20 percent of the home value up front as well as enough cash in hand for closing costs.
While the Federal Housing Administration (FHA) does have a smaller down payment requirement (10 percent), it has recently announced, along with the two other housing support agencies — Fannie Mae and Freddie Mac — reductions in the size of acceptable mortgages. The maximum loan amount that could be government guaranteed, now at $729,750 in some “top tier” markets will drop by as much $150,000. Geographic areas with less expensive homes will see their limits reduced to $417,000 (Fannie and Freddie) and $271,050 (FHA). Basically, if a home buyer needs a mortgage amount bigger than the new caps, they must go to the “jumbo” loan market for financing where the interest rates and down mandated payments are higher.
The good news for sellers and buyers is the availability of low mortgage interest rates: 30-year fixed, from 4.250 percent; five year adjustable (ARM) from 2.750 percent and 15-year fixed, from 3.375 percent. But as discussed, qualifying for these rates is not easy. The new lower government guaranteed loan limits (effective Oct. 1) will probably squeeze sellers more than buyers possibly producing price reductions to make the sales.
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