Nationally, as well as in our local market, most residential real estate activity is centered on lower end of the real estate market. There are a number of reasons why this is true, not the least of which, at least on the national level, is the sales activity driven by buyers taking advantage of price-distressed foreclosed homes and short sales. That is not our market driver locally, but there is another reason not readily apparent at first glance that may help explain why sales of high value homes are currently not very well represented in sales statistics. And that reason is that many lenders have ceased originating jumbo loans.
A jumbo loan is a mortgage with a loan amount above the industry-standard definition of conventional conforming loan limits ($417,000 for most of the U.S., up to $729,750 some high-cost markets.) Fannie Mae and Freddie Mac purchase the majority of the conforming loans sold to the market and determine their conforming loan limit. Any loan originated by a lender that is greater than this conforming loan limit is referred to as a jumbo loan. Funding for jumbo loans dried up as investors fled securities backed by mortgages without government support. This process actually started in 2007. Locally, we still have funding for jumbo loans available, but at a level nowhere near the amount that was available before the mortgage meltdown hit us.
Jumbo loans are considered riskier than conforming loans and carry a higher interest rate for reasons that has nothing to do with the borrower's credit worthiness. One reason is simply that high priced homes are harder to sell, and in the event of a borrower default, the lender is exposed to a greater risk. The rate spread between conforming loans and jumbo loans has been reported to be as much as 1.8%. In other words, you could borrow $417,000 at an interest rate of, say, 5.4%, but if you needed $450,000 to buy that dream home, the cost of money could be as high as 7.2%, if you could find it at all. This applies to qualified borrowers with good income and good credit, so you can see why buyers may be shying away from homes priced over $500,000 in many markets, including ours. However, just today, Bloomberg.com is quoting Bankrate.com as reporting that the jumbo rate premium over conforming loan interest rates is now averaging 1.03%. This is probably the effect of a number of large lending institutions just now starting to re-enter the jumbo market. By way of historical comparison, for the eight years preceeding 2007, the interest rate difference averaged only 0.29%.
The issues with conforming loans is bound to have some effect on our local market. Consider that the median list price of the 50 single family homes on the Manitowish chain for sale today is $824,900, and that the average list price for those 50 homes is $1,023,122. It is apparent even without going through the math, that even after 20% down, for most of those properties, a borrower would have to finance an amount greater than the conforming loan limit at a less favorable interest rate. Hopefully, the interest rate spread will continue to decrease, or alternatively, the conforming loan limit increased, in the very near future.