February 5, 2023

Conforming Loan Limits Surpass $1M in Select Markets

Mortgage rates edged lower this week, averaging 6.84% for the 30-year fixed loan term. Rates fell slightly across all types of fixed-rate mortgages, including FHA loans and VA loans. On the other hand, adjustable mortgage rates rose somewhat or stayed about the same week over week.

Here are the current average mortgage rates, without discount points unless otherwise noted, as of Dec. 1:

  • 30-year fixed: 6.84% (down from 6.9% a week ago).
  • 20-year fixed: 6.7% (down from 6.79% a week ago).
  • 15-year fixed: 6.13% (down from 6.23% a week ago).
  • 10-year fixed: 6.18% (down from 6.32% a week ago).
  • 5/1 ARM: 5.46% (equivalent to 5.46% a week ago).
  • 7/1 ARM: 5.61% (up from 5.59% a week ago).
  • 10/1 ARM: 5.99% (up from 5.92% a week ago).
  • 30-year jumbo loans: 6.85% (down from 6.91% a week ago).
  • 30-year FHA loans: 6.04% with 0.06 point (down from 6.14% a week ago).
  • VA purchase loans: 6.11% with 0.05 point (down from 6.29% a week ago).

Erika Giovanetti

“Mortgage rates continued to drop this week as optimism grows around the prospect that the Federal Reserve will slow its pace of rate hikes. Even as rates decrease and house prices soften, economic uncertainty continues to limit homebuyer demand as we enter the last month of the year.”

– Sam Khater, Freddie Mac’s chief economist, in a Dec. 1 statement

Amid signals that inflation has begun to retreat after peaking this summer, Federal Reserve policymakers are poised to soften their economic policy of aggressive rate hikes. Out of the six hikes the central bank implemented in 2022, the past four have increased the federal funds rate by 75 basis points.

Moderation – in the form of smaller rate hikes – could begin as soon as the Fed’s next meeting on Dec. 13-14, Federal Reserve Chair Jerome Powell said in a Nov. 30 speech.

“Monetary policy affects the economy and inflation with uncertain lags, and the full effects of our rapid tightening so far are yet to be felt,” Powell says. “Thus, it makes sense to moderate the pace of our rate increases as we approach the level of restraint that will be sufficient to bring inflation down.”

Mortgage lenders have already responded to Powell’s bullish remarks, with the rate on a 30-year fixed mortgage falling further below 7% for the third consecutive week on Dec. 1. In the past month alone, mortgage rates have receded by about a half-point from the 7.33% peak. This gives prospective buyers the chance to jump back into the housing market at a time when home prices are also beginning to retreat.

But as Khater mentions, the current economic environment – in other words, the prospect of a recession in 2023 – has left many homebuyers with a sense of unease. On top of that, December is already a weak month for home sales activity from a seasonality prospective due in part to the holidays. Given these conditions, we can expect many silent nights in the real estate market as we trudge through the end of 2022.

Indicator of the Week: The $1M Conforming Mortgage

The loan limit for Fannie Mae and Freddie Mac mortgages – which dictates whether homebuyers can get a conforming home loan or need a jumbo loan – will be $726,200 in 2023, the Federal Housing Finance Agency announced last week. That’s an increase of $79,000 from 2022, when the conforming loan limit was $647,200.

This increase was widely anticipated given the significant home price appreciation seen this year. FHFA’s House Price Index found that U.S. home prices rose 12.21% annually in the third quarter of 2022, and next year’s limits are calculated based on this figure.

The new conforming loan limit exceeds $1 million for the first time in select markets with a high cost of living, such as New York City, the District of Columbia and much of California. For 2023, buyers in these areas can borrow a mortgage worth up to $1,089,300 without having to get a jumbo loan.

When compared with government-backed conforming loans, jumbo mortgages come with stricter eligibility criteria. Jumbo loan applicants will typically need higher incomes, better credit scores, more robust cash reserves and larger down payments than other homebuyers. Additionally, jumbo loans usually carry slightly higher mortgage rates, making them more expensive to borrow.

“The higher limits will help make homeownership more accessible to Californians across the state and provide homebuyers with more financing opportunities,” Jennifer Branchini, president of the California Association of Realtors, says in a statement. “This year in California, nearly one out of every four homes sold between $1.25 million and $2 million were purchased by first-time homebuyers.”

But not all stakeholders agree that increasing the FHFA loan limit will alleviate the pressure on cash-strapped buyers. The Housing Policy Council, a D.C.-based trade association of mortgage originators and servicers, says in a statement that “excessively high” conforming loan limits will exacerbate the housing affordability crisis.

“House prices have grown much faster than household income, in large part due to supply constraints and low-cost financing,” the group says. “Taxpayer backing of ever-increasing loan sizes provides a subsidy that results in slightly lower mortgage rates which, in turn, encourages people to buy more expensive homes.”

Still, it’s difficult to argue that consumers need “encouraging” to buy more expensive homes. In fact, homebuyers have been at the whim of house price appreciation not only because they were incentivized by the low borrowing costs of 2020-21, but also due to an ongoing inventory shortage. If and when mortgage rates fall further – whether that’s in six months or six years – demand will surge higher, and only then will we know if housing supply can keep up.

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