Living in and around San Jose, paying $1M for a well located single family home is just a way of life. Even with the current housing price correction, prices for homes in decent locations still stretch toward the $1M mark. As many home buyers have experienced this summer, the lack of inventory of quality homes have driven bidding wars in desired areas, even at rarified prices.
Much of that demand can be attributable to the cheap financing available with the conforming jumbo loan limit at $729,750. Anybody with $170K in savings or equity can be a serious bidder for a home over $900K without incurring the additional financing costs of FHA or PMI. Since high paying tech jobs have held up very well with the echo dot.com bubble in full swing, plenty of buyers can scratch together upwards of $500K for a downpayment, making homes up to $1.2M affordable propositions. This has all served to price out many young couples with high incomes but less robust cash positions.
This fall, potential inactivity from Congress to renew the loan limits may cause the limit to fall to $625K. While the lowered limit will have virtually no impact on most of the country, here in the Bay Area, we will likely see some immediate shifts in buying and pricing patterns. Simply, with that lower limit, the price ceiling for affordable financing drops to $781K. While some people may be unswayed by higher financing costs, for the cost conscious home buyers, this will be a deterrent.
Obviously, this will undermine the market prices of homes around $1M and sellers will not be happy. But, for those buyers waiting around the sidelines with available cash, the level of competition will likely decline for those $1M homes. The exact percentage impact is hard to forecast, but based on other credit tightening events recently, a 5-10% drop in prices for homes right above $1M is likely. It may end up being a mixed blessing with young buyers able to get an affordable deal on a house and sellers able to sell their houses quickly to strong buyers with 30-50% downpayments.
So, for those buyers who are willing to wait for a deal, this fall may be a golden buying opportunity, with both prices and interest rates going lower (as discussed in my prior blog). Keep saving up in the mean time. Of course, finding the right home and the right seller willing to deal will require some legwork. A good buyer’s agent will likely be the differentiating factor to success.