When the government lowers its limit for an insured mortgage loan starting Oct. 1, the impact on our housing market may well prove to be staggering.
I confess that I hadn’t focused on the consequences until the New York Times rang alarm bells on Wednesday in a Page 1 story headlined “Federal Retreat on Bigger Loans Rattles Housing.” In it, David Streitfeld writes:
But now Democrats and Republicans agree that the taxpayer should no longer be responsible for homes valued well above the national average, and are about to turn a top slice of the housing market into a testing ground for whether the private mortgage market can once again go it alone. The result, analysts say, will be higher-cost loans and fewer potential buyers for more expensive homes.
The maximum government-insured loan limit through September in high-cost areas such as ours had been raised to $729,750 as the nation reeled from horrifically deflating house prices across the nation. The new limit will be $625,500.
Ironically, there’s a chance that the change may prove to be provident for buyers but poisonous for many sellers of one- and two-bedroom condos and co-ops in Manhattan.
Gird yourself for a bit of simple math. Here goes:
Assume most lenders will require that most buyers sink 25 percent of their purchase price into the property — their downpayment. With the current loan limit of $729,750, the most that a borrower can spend and be fully mortgaged is $973,000 (conveniently within the $1 million boundary for having to pay the city’s “mansion tax”).
Obviously, anyone willing and able to pay around $1 million for an apartment theoretically can qualify for a mortgage.
But what happens when the loan limit drops? The contract price then drops, too, to no more than $834,000. And that’s assuming lenders don’t start requesting higher downpayments.
Seeing the not insignificant $139,000 gap, I wonder whether buyers will retreat. Will they decide that they can’t afford what they need or desire? Will they tap other resources such as family members? Will they settle for smaller units?
Or. . . Will they drive down prices by confronting sellers with a new reality?
I checked the imperfect OLR database on which many brokers depend to get some idea of the dimensions of any future problems. In the last six months, 594 condos and co-ops in all of Manhattan at offering prices between $834,000 and $1 million changed hands; right now, there are 752 properties on the market in that price range.
It is interesting that half of the apartments for sale in Manhattan have asking prices below $845,750 — that is, the median — and half are higher. (For what it’s worth, not much for our purposes, the average is $1,212,509.)
As for one-bedroom units, the median is $649,000, close to the average of $696,315. For two-bedroom apartments, the median is $1.25 million and the average, $1,384,543.
Frankly, I don’t see how the lower loan limit can avoid pushing down prices of the hundreds of one- and two-bedroom apartments offered above the current median.
That’s because buyers will not be able afford to buy a new home later on with the extra cash they would need if going to contract at today’s prices with a smaller loan tomorrow. (Remember, they may have sufficient funds to close but not enough left over to satisfy a co-op board.)
Sellers in that narrow segment above the median up to $1 million will have to make hard choices: They can hang on in the hope of finding buyers with more resources than those same buyers have today; they can reduce asking prices; they can expect difficult, perhaps fruitless, negotiations; or they can consider seller financing, a tactic that will work only if they don’t need to extract the money invested in their homes to buy another one or for other purposes.
Given these circumstances, buyers in the one- and two-bedroom market soon may become too discouraged even to consider a purchase after Sept. 30, fewer than six months away. For now, though, those consumers may simply postpone the idea of buying a new home even longer than they already have in the hope that prices will come down.
It seems true that what happens in one segment of the market — take a gander at surging luxury sales compared with everything else — won’t necessarily affect the entire market. But I am doubtful that the new limit will have any less impact on us than a Mack truck barreling into a horse-drawn carriage.
Licensed Associate Real Estate Broker
Senior Vice President
Charles Rutenberg Realty
127 E. 56th Street
New York, NY 10022