Today Rob and Adrian talk about the recent news regarding the updated conforming loan limit.
If you’ve heard of this, had questions, or are just plain curious, tune in gain some knowledge.

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Episode 32 Transcript


conforming loan, homes, limit, market, people, higher, prices, loan, conforming, rob, selling, buy, bit, lending, appreciation, months, professionals, number, data, demand


Rob, Intro, Adrian

Intro  00:02

Welcome to the get rich, slow podcast. This is the stuff we and our expert guests wish we knew a decade ago to get the most out of our financial life will provide you with insight into wealth building activities and practices that can expand your net worth exponentially. get insight from top professionals who will reveal how to build wealth the long way, work smarter, not harder and identify your financial blind spots. With over 25 plus years of experience as licensed real estate professionals and a long track record of winning for their clients. Robin Adrian will teach you what it takes to be an everyday real estate millionaire.

Adrian  00:43

Hello, future millionaires Welcome back to the get rich, slow podcast today is gonna be a real quick one. I’m your host or co-host, I should say Adrian Shermer, and I’m here with my co-host, Rob Delavan. Hey, Rob.

Rob  00:54

Good morning.

Adrian  00:56

So, this one is based off a bit of information that you may have seen in the news or on your Facebook feed. If you were able to log in to Facebook in the last day. There is news spreading throughout the mortgage real estate world about updated conforming loan limits, the conforming loan limit is set by the Federal Housing Finance Agency FHFA mortgages under this we call them conforming loans, they generally have the lowest effective rates, sometimes they’re easier to qualify for. We’ve had some episodes about this, right? Where we’ve done you know, you can do three or 5% Down you go above this line, you get to Jumbos, 10%, down minimum. So, there’s kind of that, that chasm that we talked about that gets created, that chasm is gonna move up the up the post it sounds like, and especially with appreciation being such a rapid thing, you know, we saw massive precede appreciation, it’s a combination of several factors, right. Rob, what would you say is the major contributing factor? Why are we seeing such a push right now?

Rob  01:54

Well, over the last, you know, in essence, since the pandemic or the six to nine months before the pandemic, it was interest rates, interest rates dropped people to make payments, or buy houses based on what they can afford monthly. And therefore, prices could be higher, and payments would be the same or in a lot of cases even lower, because rates went from mid fours to mid twos at one point.

Adrian  02:20

Absolutely. How much can you afford? The answer should be a monthly payment, not a purchase price realistically when we look at the big scheme of things. So naturally, because we’re seeing appreciation, the group that runs this FH FA is going to want to raise the bar for the maximum there, their goal is to be able to finance typical family homes in most areas, including metros like Portland. And then there are some areas that have high balance exceptions. And this is where it gets kind of funky. So, Hawaii is a great example. Hawaii has a higher number, because properties are higher value on average, in Hawaii, California is another spot that has this there’s several places in the country where your limit is, right. So it shouldn’t be much of a surprise, the word quickly spread about this conforming limit going up to 625,000. It was 548 256 25 represents one of the largest leaps, I think it might be the largest leap in this value. It was our 10% no prize, we got big, because we saw this, this jumped seven years it sat at one number. And then suddenly it cranked up I remember we did a recording on that too. The problem is nothing has changed yet. The conforming loan limit is still 548 to 50 and will continue to be until November 30 at the very earliest. That’s the earliest that I might see a change. So why are people reporting 625 It all began when one major lender published an announcement that they would accept loan amounts up to 625 as high balance conforming, or HB for short, we call it on the biz. HB loans are already a thing in counties that have home prices that are much higher than the national average, like we’re talking about these markets, this announcement was significant because it extended the high balance eligibility to all counties. So, this bank is basically saying, hey, we’re gonna grab the risk on this a few days later. It you know, it’s the headline problem that we have in the world, right? People read headlines, and then they don’t read the content of an article. And if that headline is even mildly misleading, it doesn’t matter by that point. It’s as real as fact that some folks, that’s what happened here. It just spread throughout social media and everything. Hey, this is the new one. So it’s easier to say 625 is the new limit and just get people talking than to say, hey, did you see loan limits went up to 625. Also, it’s a certain lender currently offering it on high balance conforming and non-conforming high balance counties. You know, it’s just not fun. So suddenly it became the new loan limit, there is officially no new loan limit. This is just an innovative strategy on the part of a few major mortgage lenders designed to offer their clients more flexibility or get a leg up on their competition. And it’s a highly competitive marketplace lending is so you know, it’s for that reason, it’s one of these areas where we see dicey stuff, it’s kind of like, we’ve talked about the rates before too, right, I get phone calls all the time, Hey, I see rates are like half a percent lower, go down to the fine print, they want you to put 50% down, they want you to pay 2% of the loan balance upfront to buy that interest rate, etc. Right. However, all that said, it does seem extremely likely that 625 will be the least that they will jump it up to, there are predictions that it will end up going even higher than that, which sounds crazy. But again, using the index numbers that drive this, if it makes sense. That’s what they’re going to have to do, or they’re going to kind of shortcut the market. And as you mentioned in an earlier conversation, Rob, I think that’s going to impact appreciation.

Rob  06:02

So hugely, and in fact, we talked about doing a completely different podcast on it. But the short of it is. And you mentioned earlier that conventional lending is a function of within a couple of steppingstones of the United States federal government. And through Fannie Mae, Freddie Mac, you know, FH, what’s the what’s the one F h, fa, or

Adrian  06:31

FHFA is the very right group that sets it and they set it on an index called the housing price index, the HPI is what the FHFA uses to determine where they’re going to buy.

Rob  06:44

So what’s going to end up happening is, and this is like, you know, remember way back, you know, economics 101, in your freshman year of college, it is supply and demand, right? Well, if we automatically raise prices, then that’s going to increase demand, I’m sorry, if we automatically raise lending limits that the government is backing, so it makes it easier for people to buy $650,000 houses, in essence with like, 3% 5% down, versus before they can only buy like 580, well, what’s going to happen is you’re looking at about 70,000 Give or take of buying power that a lot of buyers in this range will have therefore you increase demand well, and supply isn’t necessarily going to go up, at least not as quickly, demand will be the leading indicator of that, you know, X marks the spot the supply and demand curve. And what ends up happening is prices, they’ll cross over at a higher point, which means that’s where prices will settle. So in short, over the next 12 months or so, you will probably see. And granted this is over simplified, there’s a lot of other factors in the whole economy, inflation interest is affecting interest rates. If those go up, maybe that will dampen things a bit. But you’re gonna see basically an increased demand, and therefore increased prices for those homes that are probably right now like in the low sixes, you know, high fives and low sixes that weren’t attainable by those with only three to 5% down, which is frankly, most of the buying market. In the conforming lending limits, you’re gonna see that demand go up and therefore prices are gonna go from like, you know, 590 to basically 650 Over the next 12 months now unless we see other corrective things affecting the market. So that’s, that’s an essence what this is doing. And really, this is John Q taxpayer, you and I, Adrian and all our friends, in essence, subsidizing or underwriting backing, whatever you want to call it, mortgage loans, as taxpayers, the federal government and so forth. So I’m not making any judgments on this, whether this is good or bad, I don’t think I’m qualified to do that.

Adrian  09:13

I don’t even see can be made. I mean, it’s fascinating. I mean, that he globally, you know, there are there are lots of places in the world where they don’t have a system like this, they don’t have an ethic, right, you got to have 20% down or you got to have a parent cosign you off, or affiliate England, there are places where it’s very, very difficult to get a home. So appreciate the positive in this. There is a lot of good having back. Exactly. This is a way that people grow wealth. And I’m not just talking about Robin, I mean that people gaining equity in their homes, you know, that the it’s the American dream. Sure, it’s not something you got to be asleep to what’s the you know, there’s the famous George Carlin quote, it’s real and we’ve watched people grow wealth with it many times. So, the key thing is this is a sort of self-correcting system. So, right, conforming loan limits are data at the same time, every single year, it immediately follows the November release of FHFA is House Price Index update, specifically, they use that data, they call the expanded data HPI. To determine new loan limits, as simple as, as basically just based off the data, it’s all data calculation. That’s why it parked for seven years because we had 2009 happen. So it was a result of, you know, they’re reading historical data, and they’re reacting to it. And as we, as we expand, and we’re seeing appreciation for these values, cyclically, you know, the HPI pushes up, the conforming loan limit, the higher conforming loan limit allows people to purchase homes for more value, or to build homes for more value. You know, we talked about that a few times to what it costs to build a home, it’s not necessarily a bad thing that homes are more expensive, that does mean that people can pay more to construction workers who must move these things together, you know, it’s a natural curve that must happen. It is expensive labor is expensive. In the United States, it makes sense that building a house is going to be expensive, especially in eastern trade jobs, which are suffering for people right now. Right. So they’re going to use that expanded data HPI, to determine new loan limits. And we can look at what they did. Last year, they used the quarter three results. So that’s going to be released November 30. That’s when we can really look up for this. And it shows that even if quarter three shows no improvement prices have risen enough in the other three quarters to push the new loan limit over 618,000. This has already been an analyst have already chewed into this. But those are quarterly numbers, the FHA FHFA, excuse me, releases monthly numbers that closely mirror the quarterly data, incidentally, the first month of quarter three was released this week, and it showed a gain of 1.4%. That’s enough for the new loan limit calculation to come out at 627 600. Right. So

Rob  11:58

the pressure, pressure is going up is very likely,

Adrian  12:02

it’s going to be more than 625 625 is a very safe, highly educated guess. And that’s why you’re going to see it advertised and marketed right now. Because these companies are they’re basically taking a very safe gamble and saying, we think the limit is going to get high enough, by the time we must deal with these selling these transactions. So we’re going to take on the risk up front, which is there, right? And then cross our fingers that we can sell on the back end, right is very likely going to be able to though, so it’s exciting stuff. Overall, this sounded a little negative for the beginning. It’s really you know; this is there’s a difference between marketing and the actual rules. Right, the good news is, is a high indicator of what’s to come. And recent housing data shows that the market is still charging forward, there has been a decrease of only 1%. In mortgage applications, building permits are down as well, although that’s also a function of some of the COVID stuff that we’ve seen. Housing starts, though, are up over four and a half percent new home sales are up 1%. So we’re seeing a lot of interesting data. This is June and July numbers, that shows that this is not, you know, we’re not we’re not seeing a bubble pop. And we’re not even really seeing the crest of the curve quite yet. And Rob, maybe you can speak more to that, you know, what are you seeing out there as you make it?

Rob  13:25

Oh, what’s interesting is like our market here in the Portland, Oregon metro area is very cyclical. Basically, from a season standpoint, so every year where we have a hot humid market where it rains, it rains a lot here in Western Oregon. And basically, every year we have a run up, it usually starts in, you know, you start feeling it a little bit in February, by March, April, you’re running will usually peak sometime in the, you know, early to mid-summer, it kind of flattens out and then things just relax a bit, you know, usually by end of August through the end of the year, and then we repeat. That’s on increasing year. Well, if you actually look at yours that the market has been down, you still see a similar uptick or maybe lack of drop, if you will, in the spring because I mean, at the end of the day, people really do want to figure out where they’re going to be by, you know, the spring summertime just because so much of the housing market is dictated by school schedules and, you know, families and you know, people upsizing people downsizing, just all of those things. It’s just, exactly, and that’s a big driver every year for the spring and summer so that people are in and settled and all that sort of thing by the end of summer. Now conversely, there’s other markets, you know, for example, like Phoenix, yes, they have that spring run up by at the same time, they have a busier winter than we do. Because frankly, everybody wants to be down in Phoenix in the wintertime, you have the snowbirds affecting the market more so, so they don’t see necessarily as much of a drop off as we do just because you know, 115 degrees, not cool. Literally pun intended, I guess. But you start getting into, you know, the wintertime, and it’s 76 degrees, and just gorgeous, you know, so that’s, that’s where you want to be. So, you know, you’ll have to have that trusted, professional realtor in your pocket. Just I mean, and we’ve said this before, but I mean, make sure they’re top 5% in their market, the bottom 95% of us just, you know, aren’t necessarily as good as our, our jobs as the top 5% Yeah, but that aside, we’ll get off that soapbox. Just, you know, know that there’s a seasonality nature of it. And I just love to set up clients, you know, with you, you know, say over the summer, oh, man, it’s competitive. You know, we’re getting beat out multiple offers that sort of thing. Well, hey, you know, if your situation will allow you, why don’t you set yourself up so that we can buy in October, November, December, when things calm down a bit. And that’s the, you know, they’re pre-approved, they’re ready to go, they know their markets, and we love those fall winter buyers, because you absolutely, you can’t do that. And that’s what we’re seeing right now is we are cooling a little bit thing are a little less competitive. We’re negotiating, you know, incredible deals with, like, as we speak with on inspections, on, you know, concessions, that sort of thing, even in competitive situations, we’re getting more and more from sellers around the margin versus just sale price. So and then that’s that value that you know, professional negotiators bring,

Adrian  16:53

you know, what do you say to the person who says homes, or I hear homes are selling for 100,000? Over asking?

Rob  17:00

I say, yes, that may be the case, depending on the home and out of 10 homes in the neighborhood with the features and price range that you’re looking for. So be it but if somebody is saying, oh man, you know, I’m trying to buy a $500,000 home and they’re selling for six, well, you have the wrong price point. Really, your sums are selling for 100,000 over, that means they were priced 100,000 under you must have a pulse on the market of what your end game is. Really, at the end of the day, that’s a marketing ploy to drive a whole bunch of buyers to one place. And then generally speaking, if there’s that much competition, you know, five or more offers, even two or three offers, you’re generally going to get like 3% above market value, sometimes five or you know, six 7% to

Adrian  17:51

valid strong, I’ll be it. It’s one of those bankrupts. Maybe that’s all. I’m always like, what’s the address? What’s, you know, no one ever knows this. Is this this wife’s tale that’s passed around. And it’s, you know, it sounds like they were listing it for 100,000. Andre, that’s fine.

Rob  18:08

With that said, I mean, we’ve had several properties that we’ve listed and sold this year, and the highest one that we sold above list price was 125. Over were and that was though, that the listing price was to over a million it was it was like 1,000,050

Adrian  18:30

percentage wise, not quite. Right. So it serious, but it’s selling right 45 Over on a forerunner $50,000 homers,

Rob  18:37

right, but it was 11 or $12,000, or I’m sorry, 11 or 12%. Over. And we did have, you know, a multiple offer situation. So and it was incredibly dialed in. So

Adrian  18:50

yeah, those are special properties. There are some special properties. It’s the you know, in the town I grew up in there was a big, notable White House, right on the main street, you know, there isn’t another there isn’t a comparable property to that, and people write an over dollar, because that’s an experience that you can’t change that you can’t reproduce that very easily. So sometimes companies will sell in their value will be in a manner that doesn’t match with how homes are appraised, I think is the way that I’m seeing some of that stuff. And yeah, that’s just the reality of it.

Rob  19:23

But the interesting thing about that trade at a premium, interesting thing about that one is it appraised out no problem, which is interesting. And we felt like it was going to appraise a little bit low, and it came into value. So no problem but what you’re talking about there in forever,

Adrian  19:37

that’s just anecdotal evidence, you know, that’s not an indicator market, but I’m sure personally I’m not seeing them quite No,

Rob  19:44

not like last year now, like 2020 2021 has been good and there’s some reasons for that. In an increasing market, you see you basically the appraisers know that that’s coming and you’re Especially this fall, like what we’ll probably see decreases in appraised value, like by the spring, just because things will relax a little bit most likely. But if you have high prices in the last three, four months behind you, you’re never going to be short, because the appraisers go out that back six months. So there’s some structural things, and we actually have an appraisal episode that that kind of covers a lot of that this is just a really interesting thing, it’s going to be fun to watch, I think there’s going to be some value opportunity for people to get in on the early end, because over the next 12 months, there’s going to be some serious pressure for these homes to basically increase in value by roughly what the increasing conventional lending limits are. And this is, you know, me

Adrian  20:49

feeling like an artificial ceiling, right, that gets created by this, you know, we talked about this the supply and demand, the demand, the number of potential buyers is much higher in the pool of can this be purchased with the conforming? If 625 is what it goes up to 3% down is about, it’s a little more than $644,000 purchase price, or you can buy a $658,000 home with a few 100% or 5% down. That’s already amazing. And that’s a jump that’s an absolute leap from where we were before. So I’m very excited about it. Even if you have a higher down payment conforming loan, they make a lot of sense. We’ve talked about that low down payment structure a lot, but it actually and that’s just because that’s that hits for a lot of people, right, there’s a big amount of money to pull aside. But conforming loans are also they have more relaxed underwriting guidelines. You can take advantage of certain tricks. This is these are I mean; the rules are literally you can look it up. It’s available online. It’s public info, but it’s 1000-page document.


It’s yeah, sick.

Adrian  21:49

I know, the FHA one is 1000 pages. So and it just deals with all these, you know, it’s taken decades to build out these concepts. So, yeah, exciting news. Thanks for your time today, Rob. Any last thing?

Rob  22:07

You know, just rely on your professionals. Just because you’ve been qualified doesn’t mean you should. But with all of that said, this is opening new opportunities for a lot of different people. So absolutely. From that standpoint, it’s positive, you can

Adrian  22:23

apply now. And when the limit changes, boom, you ready, you can jump up to that assuming you can qualify for that loan. So you don’t have to wait to apply again. home financing is not like an auto loan or credit card where you know, it’s gonna be the rules of that day. As things become as things change as a living document kind of process, you get a raise or something like that. We’re going to factor it in. Even after contract, it’s still got to be dialed in. So yeah, if that’s something that’s going to open it up for you get in there now get yourself pre-qualified and then refreshing that when the rules change is going to be a lot easier than starting from scratch.

Rob  23:00

Exactly. All righties. Well, I appreciate y’all listening and we’ll look forward to the next one.

Adrian  23:08

Catch you next time. Thanks. Yep, thank

Intro  23:09

you for listening to the get rich, slow podcast. If you like what you learned, please subscribe, rate and review so we can grow wealth for even more families.

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