Will Fannie / Freddie Raise Conforming Loan Limits in 2017?

Casey Fleming

Fannie Mae and Freddie Mac (The Agencies, or F / F for shorthand) continue to make the vast majority of loans in the United States.  Each year they set a limit (the conforming loan limit) for the size of loan they will purchase.  As the average price of homes in the U.S. rises the conforming loan limit goes up, too.

But the conforming loan limit has not increased

However, due to the collapse of housing prices during the great recession and the slow subsequent recovery of home prices, the agencies have not raised the conforming loan limit since 2006.

In 2008, in response to the financial crisis a new category of conforming loan was created called a high-balance conforming loan limit to help homeowners in higher-cost areas in the country.  The maximum high-balance conforming loan limit was set at 125% of an area’s median home price, subject to a maximum of $729,750 (later reduced to $625,500.)

Other than these two changes, the conforming loan limit has stayed the same for 11 years because the nationwide median home price had still not recovered to pre-crisis highs.

But now…

According to a number of indexes which track housing prices, Fannie and Freddie might finally be ready to raise the conforming loan limits.  They usually announce the next year’s loan limits around Thanksgiving, so we have to wait eight weeks or so to know for sure.

Let’s take a quick look at housing prices over the last 10 years or so.

One of the challenges with trying to measure home price growth over time is that if we use the average sale price or the median price it is influenced (very heavily) by the development of new homes.  (New homes sell for more all things being equal, and thus drive the “average” home price up, but that doesn’t mean they improve the price of an existing home.)

So most home price indices have been designed to try to track the value of homes, rather than the average price of homes in the market, over time.

We're very close to peak home values again
We’re very close to peak home values again

Case-Shiller Index

The Case-Shiller Index studies repeat sales of single-family homes, on the assumption that by tracking homes that sell multiple times (over time) the data skewing of new home sales is eliminated.  It doesn’t account for physical depreciation or remodeling or other improvements, but overall it’s probably a good indication of home price trends, and is recognized as the most influential of the indices.

The FHFA index generally agrees with Case-Shiller
The FHFA index generally agrees with Case-Shiller

FHFA House Price Index

The Federal Housing Finance Agency (created after the 2008 financial crisis) is responsible for overseeing Fannie and Freddie.  The FHFA produces the House Price Index which tracks the value of homes over time by gathering data points each time a home is sold or refinanced using an agency-backed mortgage.  This index does not go back as far in time, but has more data to track since it has access to refinance-related transactions, and not just purchase transactions.

Zillow's index shows less volatility. Is that because of methodology?
Zillow’s index shows less volatility. Is that because of methodology?

Zillow Home Value Index

The Zillow home value index uses data aggregated from multiple sources, including sales, county records, tax assessments, real estate listings, mortgage information and GIS data.  The Zillow index is unique in that individual homeowners can “claim” their own property and enhance the information about their home.  (e.g. updating or additions.)  Whether that feature makes the data more reliable or less reliable is debatable, but it certainly means the index is based on more data.

The results are clear

No matter which index you look at, it’s clear that housing prices have recovered to about the point they were before the financial crisis hit.  We don’t have data yet for the third quarter of 2016, but most anticipate that home values have surpassed the high before the crisis, and with millions of new homes added into the mix the average price of homes is surely above the previous high.

What happens if you include new homes and look at values in the aggregate?  The National Association of Realtors (NAR) reports that the median price of a home in the second quarter of 2016 was $240,700, significantly above the house price index of any of the indexes.

So clearly, the FHFA has the data it needs to begin raising the conforming loan limit again.  The question is, does it have the political will to do it?

If you’d like to review the source for the charts above, here are the links:

Case-Shiller Housing Price Index

FHFA House Price Index

Zillow Median Home Value

Zillow Median Home Prices

Casey Fleming, Author The Loan Guide: How to Get the Best Possible Mortgage (On Amazon)
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