The more I follow this real estate boom and bust, the more I appreciate the idea that the price of a product is determined by how much money is chasing it.
Unfortunately, there isn’t a lot of money chasing Phoenix area homes priced above $346,250 right now.
Jumbo Loans
Jumbo loans in Maricopa County, Arizona are mortgage loans above $346,250. Jumbo loans can NOT be insured by FHA so the lender’s risk is much greater, especially in a declining real estate market. (Each county in the United States has its own limit. The limit can go as high as $729,750.)
For homes under about $346,250, money is still available because those loans can be federally insured.
It’s a different story for jumbo loans and their “jumbo” homes. There is very little new jumbo lending nationwide.
New jumbo lending, which includes refinancing as well as debt for home buyers, totaled $348 billion in 2007, before dropping to $98 billion last year as mortgage companies tightened standards, according to newsletter Inside Mortgage Finance. Jumbo lending slowed in the fourth quarter to $11 billion, or 4 percent of the mortgage market, the lowest quarterly amount since Inside Mortgage Finance started tracking that data in 1990.
So jumbo lending went from $348 billion in 2007 to an annualized rate of $44 billion in the fourth quarter of 2008 and this year it’s probably even lower.
That has gotta put a lot of downward pressure on prices for more expensive homes - there’s perhaps 90% less mortgage money chasing those “jumbo” homes.
Jumbo vs. Conventional Loan Homes
Owners of “jumbo” homes, on one hand, usually have more money than “conventional” home owners so we have seen fewer foreclosures in the more affluent areas and less of the downward pressure that foreclosures put on home prices.
On the other hand, “jumbo” home owners don’t have a government safety net (FHA insurance) to encourage lenders to continue lending in this declining market.
Things are Tough All Over
Until prices of “jumbo” homes stop declining, it’s going to be tough to get a jumbo loan.
Therefore, my advice to “jumbo” home sellers, “Sell ASAP.”
What do you think? Am I off base here?
{ 5 comments… read them below or add one }
Dru Bloomfield 07.05.09 at 11:43 am
John, I think the Jumbo loan situation has a lot to do with the current situation in the Scottsdale market. With a higher market value (and buyers with higher staying power?), home values have declined a lesser rate than most of the rest of the valley. It will be interesting to see how the rest of the year pans out.
Peter Fork 07.05.09 at 12:55 pm
I am one of those who are waiting for prices in Scottsdale to fall to 2001-2002 levels to buy. Prices in 85260, for example, are still at 2004 prices, and inventories are high, even with the recent surge in sales. It’s easy to imagine a 20-30% drop in prices in Scottsdale in the next two years.
Whizzer 07.05.09 at 4:30 pm
I recently speculated (in my mind) and adding to the above thoughts:
Say someone has been dying to pick up a certain model in a certain
location, that had no turnover (for example) and gets an opportunity
from an REO, or desperate seller/short seller, with a nice price break,
and jumps in, delighted to take advantage. Fast Forward six months. Now there are three similar properties with no takers, and the asking price keeps . . . . The economy….LOL. Actually there is a web site
that shows many properties (!/2 million and up) available at 30-45% below what they sold for last (yes NE Metro). The author who is smarter than he looks, (just kidding) has it right. Sell ASAP.
Peter, my best guess, is that you have it about right, although I strongly believe that this economy is still really shaky, and you may
yet be too high. Sell before 2011, as the stimulus will carry us that
far.
azrob 07.05.09 at 8:06 pm
its probably too late, as there aren’t many buyers (due to loans, appraisals, and high paying/bonus jobs) today… If you can get a buyer, great, you dodged most of the bullet!
thanx god I sold my mcdowell mountain home 4 years ago, and moved to Tempe! Thank you housing bubble for all the money! Love you long time!!!!
david wilson 07.19.09 at 7:10 pm
Off the mark??
In 2008, it was obvious that 2007 was the highest of the highest for N Scottsdale! You are only 1 year late. That translates to 100,000 to millions of potential equity per house. OOpps.