The Federal Housing Finance Agency (FHFA) announced the conforming loan limits for 2016 today. Limits will rise in a 39 counties around the country. The national conforming limit remains unchanged, but could rise in the near future.
Every year, the FHFA evaluates home price growth at the national level in order to adjust the national conforming loan limit. That limit currently stands at $417,000 and will not change in 2016 despite several years of strong price growth. However, the loan limit in certain high-cost areas will rise. The high cost limit is defined as the lesser of 1.15 times the local median home price or 1.5 times the national conforming limit or $625,500. Thus, for an area with a median price of $400,000, the conforming limit in that county would be $460,000 as its median times 115 percent is greater than the national conforming limit and below the high-cost limit.
For fiscal year 2016, the FHFA announced an increase in limits for 39 counties, most of which are concentrated in Denver, Boston, Seattle, and Nashville, and four markets in California that include San Diego (see bottom table). No counties will see a decline in their limit.
In 2007, the national conforming loan limit was frozen at $417,000 as the economy entered the great recession. As home prices fell, the limit was held constant until subsequent price growth could justify raising it above the 2007 level. Earlier this year the FHFA requested public comment on which measure of home price growth to use to adjust the national conforming loan limit. A new price index was chosen to adjust the conforming limit, but of significance was the implication that the FHFA was anticipating an imminent increase in the loan limit. Based on the new methodology chosen, the current price level remains roughly 3.7 percent below the seasonally adjusted level from the third quarter of 2007 when the limit was frozen. NAR is currently forecasting quarterly annualized price growth of nearly 4.7 percent for the four-quarter period ending in the 3rd quarter of 2016 suggesting that the conforming limit may rise in 2017 based on the new methodology. As depicted below, the FHFA’s seasonally adjusted purchase index, an alternative measure of price growth comprised only of data from mortgages backed by the GSEs, is 0.3% higher than the 3rd quarter of 2007.
FHFA’s Decision Impacts FHA Borrowers
The conforming loan limit is doubly important as it also defines the maximum loan amount that can be financed through the Federal Housing Administration (FHA). The FHA’s national limit is 65 percent of the conforming limit of $417,000 or $271,050, but it too rises to as much as $625,500 in high cost areas based on the local median price. Given the FHA’s sharp 50 basis point reduction in its annual mortgage insurance premium last January, a higher local limit allows more consumers to access lower cost home financing or to get access at all.
With mortgage rates set to rise in the coming quarters and access to credit for some home buyers limited in the private sector, a change to the conforming and local limits is gaining importance. However, limited supply remains a heavy headwind to entry level home buyers.