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Reduction in Loan Limits Will Hurt Massachusetts Real Estate Market

Time is running out. Government backed loan limits will be decreasing on October 1st.  This is a major issue for states like Massachusetts, New Jersey, New York and California.  If we compare Massachusetts home prices to the rest of the country they have held fairly well. Prices have dropped anywhere between 20% to 40% across the state but not as much as other markets that have seen prices cut in half and worse. This will change once the loan limits decrease.

Unless Congress grants an extension, as of September 30th limits on loans backed by the Federal Housing Administration (FHA) and government-backed housing lenders Fannie Mae, and Freddie Mac will fall. These loan changes would affect counties in the U.S. where median home prices tend to be higher than the national average, which means people living in Massachusetts will have to pay a higher rate or won’t be able to buy at all when purchasing a home starting in October. This will have a severe negative impact on home prices currently above these limits.

See the Graph Showing Decreases in Fannie Mae and Freddie Mac Loan Limits for Massachusetts and New Hampshire

Why Are They Changing the Loan Limits Now?

In 2008 when the mortgage meltdown went into high gear the government made a smart move by increasing the loan limits in an effort to make up for the lack of bank lending.  This was only meant to be temporary. Now the government is working hard to decrease their involvement in lending but they are doing it much too early.

Counties in the U.S. Affected by Loan Limit Changes

Dollar Value Differences After FHA Loan Limit Changes, by County















How Loan Limit Changes Affect The Real Estate Market

These loan limit changes will decrease the amount of buyers which, in turn, will increase the supply of houses, resulting in a decrease in prices.  For example, let’s look at Worcester County Massachusetts.  The current FHA loan limit since the 2008 increase is $385,000 and starting on October 1st it will go down to $285,200.  That is a $99,800 drop!

FHA loans allow first time buyers to buy homes with as little as 3.5% down.  Such loans are being used in over 70% of first time purchases nationwide.  Buyers who are able to qualify for a mortgage without any problem will now either 1) not buy or 2) buy for less than $300,000 which will probably be a house that they don’t want and does not fit their needs. Since this will reduce the amount of people able to buy homes priced above the new limit, those homes will be harder to sell and prices will drop.

See the Graph Showing Decreases in FHA Loan Limits for Massachusetts and New Hampshire

The Homeownership Affordability Act of 2011 has been introduced in the House and Senate and would extend the current loan limits for two more years.

But these limits most likely will be allowed to decrease is because they will significantly affect four states (Massachusetts, New Jersey, New York and California).  Those are the states with the higher home prices and do not have enough members of congress to vote for an extension. Access to affordable housing is crucial for a healthy economy.  Decreasing limits will affect nearly every state, not just high cost areas.

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