Does Limiting Maximum Loan Limits Help Decrease Home Prices?
Fannie Mae, Freddie Mac and the Federal Housing Administration (FHA) all have maximum loan limits that are updated each year. This year, in both cases, they have been updated to reflect market conditions, and those market conditions are of course frothy. This means that the standard loan limit at Fannie and Freddie is moving up 18%, and loan limits at the FHA are rising by a similar amount in many cities.
This has given rise to some consternation, with some pundits complaining that this is contrary to their mission of facilitating affordable homeownership: “Instead of making housing more affordable, the agencies are helping buyers take on even more debt to buy a home in this market.”
However, recent experience suggests that concern about loan limits is misguided. Several years prior to 2003, home prices per the Case-Shiller index had risen nearly 10% annually, and regulators for Fannie Mae and Freddie Mac generally matched those increases when they adjusted the maximum loan limits each year. Fearing their loans were helping fuel a bubble in 2004, they increased the limit by only 3%. However, prices in 2004 increased by 13% anyway. Again, they only raised the limit in 2005 by 8%, and again, prices increased by 14%. In the meantime, borrowers seeking ways to fund increasingly expensive homes piled into new, privately securitized loans that were alternatives to Fannie and Freddie.
The rest, as they say, is history. While we continue to forage for the right lessons to learn from the previous housing boom, it is pleasing to see that the FHFA and HUD have learned the right lesson here. Depriving Americans of conventional lending sources isn’t a very effective way to promote safe borrowing or moderate housing costs.
It is also difficult to argue that loose lending markets are to blame for high prices. The differences in home prices between cities has become massive. The median home in Houston costs about $250,000 while in San Francisco it is well over $1 million. Increasing federal loan limits will not cause home prices in Houston to rise to $1 million any more than lowering them will reduce home prices in San Francisco to $250,000. Furthermore, in all cities, the recent price boom has not been mortgage driven. A large percentage of buyers widely reported to be bidding homes above appraisal levels in most markets are cash buyers, institutions, or buyers with large down payments. Loan access is not the margin that will moderate the direction of those markets.
Furthermore, in every major metropolitan area, it has been the most affordable neighborhoods, well under the loan limits, which have been rising the most sharply.
What debates should we be having instead of worrying about loan limits? Those should focus on the more fundamental reason for rising housing costs — increasing rents. Rents are going up because of oppressive zoning and land use rules in many American cities. They may also be rising, ironically, because tight underwriting since the 2008 financial crisis has worsened the lack of adequate building, which is fueling those rising rents.
The reason home prices with values under the loan limits are rising faster than homes with values above the loan limits is because rents on those types of homes are rising faster. Removing convenience and liquidity from mortgage markets would be a misguided method for solving that problem. The FHFA and HUD are correct to adjust to market conditions. And in fact, as long as these lending institutions continue to operate, mortgage markets and housing discourse would likely benefit from avoiding this annual conversation and removing the limits altogether. Much like federal debt limits, they are a legislative vestige that creates a lot of noise but serves little purpose, mostly fueling debates whose main function is to divert attention from more fundamental issues.