1994’s Limit Was $203,150
When I got into the mortgage business in 1994, the conforming loan limit was $203,150.
Adjusting for inflation, that is about $408,000 today (almost exactly 2x the 1994 amount)
The median house price in 1994 was about $130,000, while it is about $455,000 today (about 3.5x the 1994 number).
Today’s maximum conforming loan limit (for Fannie Mae and Freddie Mac loans) for a single-family residence is $726,200 (about 3.5x the 1994 limit).
The “High-Cost Area” conforming limit is now $1,089,300 – or almost 8.5x the 1994 limit.
So – why did home prices surge so much more than inflation? It was partially because the conforming loan limits have increased so much.
It is not a coincidence that the median house price and the conforming loan limits have increased since 1994 by the exact same multiple (3.5x).
Yes, I realize that conforming loan limits FOLLOW median home price increases (as the limits are increased as home prices increase), but the higher limits also drive higher home prices.
Housing Just Got Way More Expensive – For High School Kids
While higher conforming loan limits benefit the current crop of homebuyers and all of us in the mortgage and real estate industries now, they simply make housing more expensive in the long run.
This is because those higher conforming loan limits are pure subsidies by the government, and subsidies ALWAYS have the effect of pushing prices higher.
They are “subsidies” because the government is effectively backing loans (via its support for Fannie and Freddie) that the private market would never support.
So, when today’s crop of high school kids is ready to buy homes, homes will simply be that much more expensive because the conforming loan limit was raised so much today.
It is very similar to how government financial aid programs have resulted in higher college costs – that vastly exceed inflation rates.
Can Jumbo Loans Fill the Void?
While jumbo loans do offer lower rates now, they could not fill the void left by Fannie and Freddie if conforming loan limits went down.
This is because jumbo loans require better credit, more income, and much larger down payments.
It is amazing to me that someone can now buy a home for almost $1.2 MILLION with only 5% down, with conforming financing.
No jumbo lender would go near that loan because of the risk.
High Conforming Loan Limits Result in a Much Tougher Mortgage Environment
I rarely closed Fannie Mae and Freddie Mac loans in the 1990s – so conforming loan limits were almost irrelevant.
I had hundreds of other funding sources that offered much lower rates, better loan programs, and far easier underwriting guidelines.
It was only after the 2008 mortgage meltdown that conforming (Fannie Mae and Freddie Mac) loans became so dominant.
And – as a result, the entire mortgage industry is now hyper-regulated and loans still remain unnecessarily difficult to close.
But for government involvement and regulation, getting a mortgage (via A.I. primarily) would take about an hour (if that).
But, Didn’t the 2008 Meltdown Prove That We Need Regulation?
It was largely the government that caused the meltdown via excessively low rates, Fannie Mae buying subprime loans and creating a market for them, government-blessed rating agencies giving the bad loans “A+” ratings, affordable housing requirements that forced entities to make bad loans, and the implied backing of all the bad loans by Fannie and Freddie.
In the 1990s, we had no major issues with residential mortgages because there was no market for bad loans and there was no implied backing by Fannie Mae – so the private entities making and buying the loans were much more careful to make sure they would actually perform.
Subsidizing the Wealthy
Here is a final point that the WSJ illuminated today: should the government be subsidizing people wealthy enough to buy $1.2 million (or more) homes? Borrowers need to earn over $200,000 to buy such homes – at a minimum – and those are probably not the people that Fannie and Freddie were set up to help.
SO – WHILE I WILL TAKE ADVANTAGE OF AND BENEFIT FROM HIGHER CONFORMING LOAN LIMITS…. there is nothing I would like to see more than a far smaller role for Fannie, Freddie, and the government in general. Mortgages would get both cheaper and easier as a result. And our kids and grandkids would find housing much more affordable.
New 2023 Conforming Loan Limits
The table below shows the conforming loan limits for both “low-cost” and “high-cost” areas.
Texas is entirely “low-cost,” while most of Coastal California is “high-cost.”
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