Jumbo Mortgage Rates – what goes up must come down, and back up?

Yesterday Congress came closer to raising the jumbo loan limit back to its 2008 peak of $729,750 after letting it fall to $625,500 on October 1st.  Abundant press coverage suggested the drop would further harm a lifeless housing market, with the National Association of Home Builders announcing that more than 17 million homes could be affected.  Several clients have asked if this up-and-down affected potential buyers of their homes, and the short answer is no.


The jumbo loan limit climbed to $729,750 as part of the 2008 economic stimulus package.  However it is restricted to specific high-cost areas, most of which are bigger cities along the coasts.  In Maricopa County (the limit is determined by a county’s average home values) the jumbo loan maximum has remained at $417,000 since 2006.


Although the reality of these changes won’t affect our market, the uncertainty doesn’t help end perceptions of “I want to buy but it’s impossible to get a loan,” or “I want to sell but nobody can get a loan so why bother?”  How many buyers or sellers-soon-to-be-buyers want to capitalize on values in today’s market but, perhaps incorrectly, believe they would be ineligible for a loan?


The Wall Street Journal reported that in 2010, 27.4 percent of all mortgage applications made in Arizona to the top 10 lending institutions were denied, a number right around the national average of 26.8 percent.  Denial rates were much higher in Texas, Mississippi, and Vermont, where denials numbered near 40 percent of applicants.  While it is not quite the “no-doc” days of 2005, there are still plenty of Arizonans able to buy a home at historically low rates, with or without jumbo loan guarantees.


As a seller, I’d want to know how many buyers are dependent on financing and how many are using cash, so I looked it up.  In metro Phoenix, about a third of all buyers pay cash; most of these sales are to investors.  In our luxury market, the number of investors is lower but the percentage of cash buyers is actually higher.  Approximately half of my buyers, or buyers brought to my sellers, have paid cash.  Looking at this from a seller’s point of view, if half of the luxury home buyers are paying cash and 72.6 percent of the financed half can get a loan, that tells us that about 13.7 percent of potential buyers would be unable to purchase your home.  In fact, that number is probably a little too high because I used the statewide average of mortgage denials as reported by the WSJ, when luxury home buyers are often able to secure financing from a variety of sources.


But of course it isn’t always about the numbers.  Buying and selling a home is loaded with personal opinions, emotion, and tastes, but by accounting for what we can quantify, I hope this sheds some light on an important topic.