In Focus: Jumbo Loans

By Arun Barman, Research Economist

Mortgage rates continue at 50-year lows. Such low rates are contributing to record housing affordability levels. Indeed, in April of this year, NAR’s housing affordability index registered a reading of 178.8 – the highest index figure since NAR began tracking the index in 1970.

However, the historically low mortgage rates only apply to Federal Housing Administration (FHA) and GSE (the Government Sponsored Enterprises, Fannie Mae and Freddie Mac) loans, not to jumbo loans above the applicable loan limits for the geographic areas of the country. Although legislation last year increased the conforming loan limit to as much as $729,750 in high-cost areas, the mortgage market now has three primary types of loans.

• Loans up to $417,000 are considered “conforming”
• Loans between $417,000 and $729,500 are “conforming jumbo”
• Loans over $729,500 are “super-jumbo.”

So, while those conforming mortgage rates are at historic lows, jumbo loans in general continue to remain at higher rates and are more difficult to obtain.

NAR recently conducted a study on developments in the jumbo loan market.* The research reveals that limited availability and higher interest rates in the jumbo loan market are adversely affecting the rest of the housing market and holding back a genuine housing recovery.

The Jumbo Loan Market

As recently as 2007, jumbo mortgages comprised 10 percent of all mortgages for home purchases and 30 percent of mortgage originations in dollar volume. But the ongoing credit crunch in the jumbo mortgage market has stalled home sales of high-priced homes, despite some recovery taking place in some mid- and low-priced home markets. The national share of home sales above $750,000 has fallen from 4.4 percent in 2007 to approximately 2.3 percent in 2009, and the months’ supply of inventory has risen from 18.7 months to 41.1 months during that same period. The market share of jumbo loan originations has fallen to 6 percent from the typical 15 percent.

Jumbo loans are of significant importance in high cost areas and states, such as California, New York, and Florida. In California 39.2 percent of homes were priced above $500,000 (above the $417,000 national cap for GSE loans in effect before the high cost area loan limits were adopted). Furthermore, four additional states had more than 20 percent of the housing stock with prices exceeding $500,000. States that have the highest percentage of jumbo mortgages include Hawaii (43 percent of all loans are above $417,000), California (41 percent), the District of Columbia (30 percent) and New York (22 percent). In eight more states, jumbo mortgages comprise 10 percent or more of all loans in those states (New Jersey, Maryland, Massachusetts, Virginia, Connecticut, Washington, Nevada and Florida).

The role of jumbo loans in some of these states is even more apparent when one looks at the dollar volume share of jumbo loans. In 2007 (the latest complete data available), jumbo loans accounted for 65 percent of the total dollar share of mortgage loans in Hawaii and 63 percent in California. Both these states boast metro areas with some of the highest median home prices in the country. It should not then be surprising that they also garner the largest share of jumbo loans, both in terms percentage of the mortgage market and share in dollar volume.

Economic Impact

Jumbo loans play a significant role in the overall housing market, and consequently the current lack of jumbo loan financing is measurably and negatively impacting economic activity. NAR estimates that each home sale at the median contributes $67,811 to the economy. This is based on income to real estate industries, spending on furniture and home furnishings, a multiplier effect on this spending, and the construction of new homes traditionally associated with existing home sales. As recently as 2007, jumbo mortgage market activity and associated home sales resulted in $78 billion in economic activity.
Because of credit market problems and much weaker activity in the jumbo loan market, NAR estimates a decline of $42 billion in economic activity.

Refinancing

Problems in the jumbo loan market also affect those current homeowners who want to refinance. Indeed, the inability of homeowners to refinance their jumbo loans is holding back potential consumer spending for the overall economy. If these homeowners had the opportunity to refinance into historically lower mortgage rates, many current jumbo mortgage holders could save $6,000 to $15,000 in annual interest costs.

Impact on Housing Activity

There continue to be significant problems in the jumbo loan market. Interest rates on jumbo mortgages remain elevated above those available for conforming loans. That has put a dent in home sales activity in many markets. The inventory of homes available for sale remains elevated. NAR estimates that there was a 9.6 months supply at the end of May. While that is an improvement, generally a 6-month supply is considered a balanced market. The continued high inventory puts downward pressure on home prices. The months’ supply of high-priced homes for sale (i.e., those for which jumbo loans would be originated) generally is higher than lower priced homes. However, the inventory situation has dramatically worsened in the high-end market with months’ supply in 2009 at 41 months compared to 18 months in 2007. In addition, defaults and foreclosures of both conforming and jumbo loans have been rising – the ongoing fallout from the subprime mortgage crisis and the current economic recession.

The Realtors® “Take”

As part of its study on jumbo loans, NAR surveyed its members for their input on the jumbo loan situation. The majority of Realtors® responding to the survey indicated that higher downpayment requirements and higher loan rates (relative to conforming loans) were significant problems. Nearly a third of Realtors® report that there are fewer jumbo loan providers. And more than four out of ten Realtors® reported that buyers who wanted to purchase a high-end home but could not get a jumbo loan (or want to pay the higher jumbo loan rates) have virtually dropped out of the market.

Conclusion

Although the upward revision of the conforming loan limit is a positive development, overall the jumbo loan market has experienced problems of limited loan availability and higher than usual interest rates in recent months. Increased credit standards required of borrowers coupled with the increasing reluctance of financial institutions to make jumbo loans have posed major problems at the higher end of the market. In addition, the interest rate spread between ten-year treasuries and jumbo loans has substantially increased—making jumbo loans much more costly than has previously been the case and significantly affecting the upper end of the housing market.

The jumbo loan market plays a significant role in the overall housing market. The availability of jumbo loans is particularly important in high cost areas. NAR is working with policymakers to insure that these mortgage loans continue to be available, and so help stabilize the housing market and help lead to a quicker broad economic recovery.