The pool of qualified new home buyers appears to be running thin in California. The median new home price now:
- far exceeds the current 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 FSE 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.
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