Well, that took a while. After a nine-year freeze on conforming mortgage loan limits, the housing market has finally rebounded: conforming loan mortgage rate capped have been raised - if only by a modest amount. Starting in 2017, conforming loans will get a 1.7% bump from $417,000 to $424,100.
Now, $7,000 hardly sounds like anything to get excited about. Not yet, anyway. But even if the increased limit for conforming loans -- those government-sponsored mortgages by Freddie Mae and Freddie Mac -- won't immediately help next-year homebuyers, it's an indication the housing market is healthy.
"It's important, because it sets a marker that in terms of price levels, [housing] prices have been restored" back to their pre-crash levels, explains Ken Fears, director of housing finance and regional economics at the National Association of Realtors. "But more importantly, it allows the finance market to grow and expand."
Historically, conforming loan limits generally increased year-over-year since 1980 (although they were frozen for three years during the early '90s recession). Since conforming loan limits reflect the general price of housing, an increasing limit rate is a reliable indicator of a strengthening housing market.
But in 2007 amid foreclosures, falling home prices and unsold homes signaling the oncoming burst of the housing bubble, the Fed froze baseline conforming loan limits at $417,000. The forced stagnation "reflected the turmoil out there," Fears says. Since then, the market has been clawing its way back.
2017 will be the first time the market has rebounded enough to nudge the limit upwards and-hopefully-onwards. By 2018, loan limits might get a significantly higher bump.
"Right now, we are forecasting a four to five percent price increase for 2017," Fears says. That can be very good for the market; if house prices increase and loan limits match the boost, the fed could raise the cap an additional $20,000 - $25,000 in 2018. That rise would be more in line with historic housing price increases during healthy economic times.
An increase in home prices is good for homeowners and sellers because of appreciation and a bigger sale price. While it sounds bad for the homebuyer, it's actually not as black and white. With bigger loan limits, more homes can fall under the conventional home loan cap, which is good for homebuyers - conforming loan limits are the most popular loans and offer low interest rates and low down payment options. Buyers who are looking to buy outside of loan limits often take on jumbo loans which come with much higher interest rates.
"The size of the conforming loan limit is very tight. It's much harder to get loans in that space-especially in markets that are more expensive," Fears says.
There are only 39 high-cost counties that have a cap significantly higher than the current $417,000, with conforming loan limits up to $625,500. That ceiling limit will be raised to $636,150 in 2017. (Currently that ceiling has been met in only in one county, Napa Valley, Calif. New York City, along with the rest of the country, is considered a general cost, or baseline, area.)
Right now, the housing supply is low, which drives home prices up. Fears says around 740,000 new homes were built in 2016, about half the historic average for new home builds. In October, NAR chief economist Lawrence Yun called the lack of new builds "'grossly inadequate in relation to demand.'" Couple that with a lack of millennials entering into the home construction work force with an already shallow pool of laborers and it seems unlikely that new homes will be popping up like daisies.
This is all "potentially" speaking though, Fears says. If new builds do increase next year and market rates rise, price increases would slow due to a bigger supply and a higher-cost entry point. There's a bright side to that too. A slowed increase of prices would allow some homebuyers to "catch up" with the market before prices inevitably increase, according to Fears.