MAJOR CORRECTION: I’m going to sticky this post for a few days. Max loans aren’t going down nearly as much as I thought they were. So the situation isn’t all that dire. It’s worse, but not all that much worse… Essentially the limits on conforming loans are going down just 15% after September 30. I’ve stricken the parts that were wrong, and put corrections in italics.
The big news today was that it seems there’s bipartisan support for lowering the loan limits for Fannie and Freddie in high cost areas like New York. Assuming it happens, it could have a rather profound effect on places like New York – and it will particularly affect Harlem townhouse shells where many of us depend on the higher loan limits to make the numbers work and the banks avoid the risk of renovation loans.
Right now in NYC, you can borrow up to $729,750 for a 1 family home without having to get a “jumbo” mortgage – that will drop to $417,000 $625,500. For a 2 family you can currently borrow up to $934,200 – that will drop to $533,850 $800,775. For a 3 family you can currently borrow $1,129,250, but that will drop to $645,300 $967,950. (And so on…)
What that means is that fewer people will be able to buy townhouses since they won’t be able to qualify for federally insured mortgages that cover enough of the costs. They will have to try to get mortgages from banks that will require much larger down payments, higher incomes, and overall much less risk for the banks. There already is no such thing as a jumbo renovation loan – so renovation loans will really dry up are less likely to cover the cost of renovation come this fall. Somewhat less demand means real estate prices will could drop slightly (because of this). Properties like shells that are particularly risky will probably see the biggest drops are the most likely to be affected.
This is major will have real effects on Harlem townhouses…
Those of us who have already bought will could see the prices of our homes drop in value since there will be less competition among buyers slightly fewer buyers will be able to get the size of loans they need.
People who are buying will find it somewhat harder to get mortgages that cover all the expenses. A lot of people just won’t qualify. We wouldn’t qualify be able to do the renovation we want to do under the new rules. It doesn’t mean the buyers can’t afford the homes. Our place will actually be quite affordable once it’s all done. It’s just that the renovation process is a risk no bank wants to take on.
My advice to people who own shells that are on the market is SELL NOW! realize after September 30 the value of your place may go down even further. If you’re holding that property after September 30, you’re probably going to hold it for quite a while into the future and it will sell for substantially less money. Now is not the time to be greedy.
If you own a shell and haven’t closed on your rehab mortgage – do everything what you can to close the mortgage before September 30 – otherwise you may not be able to do as nice of a renovation.
If you’re in the market for a shell – that’s a tough one… After September 30 you may not be able to afford a townhouse at all. But closing on a rehab mortgage takes time. You need approved plans (which can take months to get), you need a contractor who’s ready to start, etc. And on top of it all it’s possible the place you buy could drop in value shortly after you buy it.
The same goes for renovated townhouses, but to a lesser degree – the situation won’t be quite as dire for livable places Renovated townhouse may not feel the hit much at all since jumbo mortgages will be available for them (just a little harder to get).
After September 30 cash will continue to be king (even more than it is now). You’ll need a large down payment PLUS pretty substantial income. It’s sorta sad really. The current crop of homeowners who are buying and renovating shells are often pretty regular Joes… A lot of them will just be priced out of the market.
I feel fortunate that we bought when we did and got our loan closed when we did. Yes, our place will most likely go down in value, but renovated places will fair better than shells since banks will be still be lending on regular, non-rehab mortgages. We’ve always taken a long-range view of the townhouse purchase. It will still be affordable for us after we get done. And I’m not sure any of this will matter in 15 or 20 years and we have every intention of living in our place for that long…
Hopefully something will happen to derail the support for these changes. It’s being implemented all wrong… They should take everyone down slowly. They way they’re proposing will hurt places like California and New York and not change anything for middle America. Hopefully common sense will prevail and none of this will come to reality. But from the sounds of it, it’s a done deal.
(Love your blog)
Interesting situation. Doesn’t an conforming NY single fam drop to $625K at expiration this year (vs. $417k)? Maybe I read the article / table wrong…
I believe a potentially more significant issue for buyers of expensive homes with lots of debt is the potential reduction in the mortgage interest tax deduction.
Ultimately, USA needs tax revenue. Existing subsidies are home ownership are a key focus.
Interesting stuff – I enjoy reading about your project.
One correction to this post – you don’t need to have approved plans to close on a 203K construction loan. We closed last August on a shell on 130th and just had our plans approved by DOB in March. Our contractor worked on things like repointing, sistering/installing joists and subfloor, insulating, etc. while we waited for approval.
Like you, we certainly couldn’t have made our purchase without the construction loan – the reduced maximums would not have provided enough $ to get the job done for us.
Also like you, we’re looking at it as a 20-30 year home, so whatever the impact is on the current market isn’t so concerning to us. The fact that many shells may continue to languish is not a good result, however.
@Bill – We have a rehab mortgage that rolls into a conventional mortgage. The bank wants us to finish within 6 months and will extend it to a year. The bank wants to know things will get done very quickly so we had to have everything ready to go in order to close the loan. Sounds like you have a very different mortgage.
The other issue is that it would be difficult to carry our mortgage for an extended period without rental income.
@Peter – You might be right. When I get a chance I’ll look into it further…
Would love to hear your thoughts on:
1. The state of the distressed vs. non-distressed market? Wouldn’t it be reasonable to assert that since the majority of the distressed market consists of all cash transactions right now that demand won’t subside but rather shift further to all cash buyers?
2. How do you think mortgage limits will affect rental demand and prices?
3. Doesn’t a good portion of NYC fall outside of the FHA limits right now? While property prices may broadly decline, it would seem that as credit becomes tighter, buyers will look to buy smaller OR continue to move to areas that are developing and spend their money there.
While credit contraction is certainly non-expansionary, I don’t think it warrants a dramatic ‘SELL NOW’ warning in a market that garners global demand and has many driving factors. There are many supply and demand forces that shift as inefficient regulations are changed. Consider the broader real estate market and the global macro environment rather than just the market for fully financed shell renovations.
@Anon – Good questions…
Someone sent me an e-mail that reminded me that habitable townhouses that are going for $1.6M to $2M are probably hitting into big cash reserves or jumbo mortgages already. It’s true to a point… But I think it’ll get tighter, but that’ll probably be true of the condo/coop market as well. Interest rates will go up and so people won’t be able to afford mortgages that are as big as they could in the past.
Because there are no jumbo rehab mortgages I think the lower limits will hit shells and SROs harder than places that have already converted to 1-4 family. People with $1.5M cash are a much smaller group than people with $500K in cash. And the people with $1.5M cash have a lot of other options – they’re less likely to be interested in Harlem. That’s why I think “sell now” is warranted for owners of shells (who want to sell).
All in all I think it’s going to get harder for people to buy. That’s not necessarily a bad thing since it means more income and bigger down payments. But in our case we were hitting one of the limits with our mortgage, but when the renovation is done it’s our place really will be quite affordable. Then again, we hit the limit because I’m self-employed and my income is lower on paper than it would be if I had a 9-5 job (more of my expenses are tax deductible).
And yes, I get the sense that people who buy shells often buy in all cash – it’s just simpler given that you need about a year of planning to pull it off. A lot of us are all around the same age – early to mid 40s. We bought real estate in the late 90s and rode the wave and were able to sell far above what we paid – so the cash is there – it’s not like all of us are rich – we just bought places at the right time. (But others are work-a=holics who make good coin…)