The October 1st decline in the conforming and FHA loan limits reduced the size of loans that the FHA as well as Fannie Mae and Freddie Mac can finance. This change was made in an attempt to stimulate the private sector and to reduce the government’s footprint in the mortgage market. However, concerns linger that the private sector is not yet able to absorb this portion of the market and that the higher rates and downpayment requirements of private financing relative to the FHA and GSEs have inhibited sales in the upper price ranges, hobbling the overall housing market.


Depicted above is the share of NAR’s Existing Home Sales for the entire U.S. broken out by price ranges. This chart depicts how the share of the high priced portion of the market, every group above $250,000, fell from July to September of 2011. This period overlaps with the time frame in which banks and non-bank mortgage originators would have increased their lending requirement to match the requirements of the non-conforming/FHA market in light of the impending change in loan limits.

However, the month-to-month decline in the share of sales in the upper price brackets may have been seasonal as larger homes tend to sell during the summer months when more families seek to move as the school year is out. To clarify the impact of the limits in light of this “seasonality” issue, one looks to year-over-year growth in sales by comparing sales for the same months in 2010 and 2011. To this end, depicted below are the year-over-year changes in sales for July through September. The uneven growth rates favored the lower price ranges suggesting that some factor was constraining sales at the upper price ranges.

The steady decline in the share of high priced sales and modest year-over-year growth relative to the lower price brackets is an even greater surprise given that mortgage rates fell sharply over this period, from 4.60% in the first week of July to 4.01% in the last week of September. The benefit to the consumer from lower mortgage rates is greater for loans on higher priced homes than lower priced homes and sales volumes tend to be more responsive in high cost areas to changes in interest rates.

How the market responds to the change in the conforming and FHA loan limits is a bellwether for other potential changes to the structure of the housing finance system in this economic climate. Statistics from NAR’s monthly Existing Home Sales release suggests that sales in the higher priced portion of the markets were stymied relative to the lower price ranges during the period leading up to the change in the conforming loan limits.