By Adam Artunian
John Burns Real Estate Consulting
A new report from John Burns Real Estate Consulting says the pool of qualified new home buyers appears to be running thin in California and there are problems also in Arizona. The cause is loan limits by government sponsored enterprises as those from Fannie Mae, Freddie Mac and the FHA.
The media new home price now:
Far exceeds the current Government Sponsored Enterprise (GSE) and FHA loan limits in Orange County, San Jose, the San Francisco East Bay, and San Diego.
Exceeds the FHA limits in Riverside-San Bernardino, where so many potential buyers have poor credit and limited savings after the tremendous recession and
Almost exceeds both the FHA and GSE limits in Los Angeles and Sacramento.
In other words, more than half of new home buyers have to qualify for a jumbo mortgage, which is much more difficult than qualifying for FHA or GSE financing. Jumbo loans require high incomes and high down payments, or at least outstanding credit with mortgage insurance.
The chart below shows the relationship between median new home prices and loan limits in the major housing markets in California. Only Los Angeles and Sacramento currently have a median new home price below both the GSE and FHA loan limits.
For many of our home builder clients, the January 2014 decline in FHA limits hurt sales dramatically, particularly in Phoenix and Riverside-San Bernardino. FHA limits are 115% of the median resale price, as determined by FHA, and thus should increase slightly next year. GSE loan limits are determined annually by FHFA, the GSE’s regulator, and are not expected to change.
Strategy to maximize profits on homes below loan limits
In summary, home sales depend heavily on government mortgage policy, and new homes are more impacted since new homes are usually priced above the median resale price. We have been working with builders and developers to develop strategies to maximize profits on homes below the FHA and GSE limits, which is much more difficult than simply building a smaller, simpler home. Today’s home buyers are highly discerning, which means builders should:
• Not put any costs into the home that the majority of target consumers do not value and
• Include all of the features that they do value and can afford, within the constraints of today’s mortgage policies
About the author: A veteran of both research and consulting departments, Adam provides unique insight for John Burns apartment and home building consulting clients. He has also co-authored several white papers for clients, including research on foreclosure laws at the start of the housing crisis. Before joining John Burns Real Estate Consulting in 2011, Adam was a Senior Financial & Research Analyst at GVA Kidder Mathews and a Senior Acquisition & Development Analyst for Steadfast Companies, conducting financial and feasibility analyses for commercial development. He holds a B.S. in Finance from Santa Clara University and works in our Irvine office.In his free time, the former NCAA Division One college tennis player still enjoys court time.
If you have any questions, please contact Adam Artunian at 949-870-1213 or by email.
This article courtesy of John Burns Real Estate Consulting. Visit their website here.
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