FHA loan limit increase…What will be the result?

  The Economic Stimulus Plan announced by the Bush administration on Thursday includes very specific provisions to encourage a positive loosening in the housing market. It’s primary aim is to help alleviate the stagnant waters in higher-priced markets such as coastal states. It will provide a shift to encourage refinancing and head off future foreclosures.

   The proposal includes a package that raises the dollar amount of loans that are backed by the Federal Housing Administration. The cap limit of the FHA will be raised to $725,000 from the current $417,000 limit, thus allowing an increase in borrowing for higher priced homes.

   This type of lending shift does not have as much direct affect for a town like Pagosa as it does indirectly. Many second home buyers who are eyeing our paradise have been waiting on the fence for a sale in other parts of the country in order to line up financing for a Colorado purchase. I have a contact that receives my monthly newsletter  named Marge. She reminds me frequently that she will be purchasing as soon as her currently listed West Coast home sells. Situated in the mid 500’s, her home falls in the price range that is directly affected by such a lift in limits. “This will have a big, immediate impact, especially in California where sales have been down most significantly,”  said Lawrence Yun, Chief Economist for the National Association of Realtors.

   One of the tough things about jumbo loans are the higher interest rates attached to them. Lenders take more risk due to the absence of a secondary market for these loans so in turn charge a higher rate.  In example- the interest rate difference between loans that fall within the cap limit and jumbo loans was more than 1 percent on Thursday — 6.39 percent compared with 5.30 percent, according to Bankrate.com. On a $500,000 mortgage, the difference is about $350 a month.

Economist Yun said  “The 1 percent drop is a huge factor… In California, it could create a mini-boom.”  “There’s a lot of pent-up demand in the market. This will boost confidence among these potential buyers, and some of the people on the fence will start buying.”

   Based on projections from the National Association of Realtors a higher loan limit which many industry trade groups have been lobbying for, would boost home sales by nearly 350,000 a year, reduce the average period of time a home sits on the market by a month and a half and support prices by two or three percentage points.

 Mix this limit lift with the interest rate easing, diminishing housing starts and shrinking inventory. Throw  in a little pent-up buyer energy and it could be an interesting year in the Pagosa Real Estate market.

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