Despite a positive 2013 for housing, a persistent weakness in the housing recovery is the relative absence of first-time homebuyers. And a recent drop in the size of mortgages that can qualify for insurance from the Federal Housing Administration takes a step in the wrong direction in helping younger homebuyers achieve homeownership, particularly in high cost, job producing metropolitan areas.
As a result of challenges that include higher unemployment among the young, rising student loan debt burdens and tighter credit standards, first-timers make up a relatively small share of homebuyers. For example, according to data from the National Association of Realtors, first-timers made up 28 percent of existing home sales in November, compared to a share of approximately 40 percent that is considered normal.
The maximum size of a mortgage that can qualify for FHA insurance is governed by county-specific loan limits published by the Department of Housing and Urban and Development. While these limits were expected to decline in 2014 due to the expiration of stimulus legislation enacted during the Great Recession, the magnitude of the December-published declines for 2014 limits caught many observers by surprise. This occurred because in addition to declines in the national loan limit ceiling (from $729,750 to $625,500) and the loan limit multiplier from 125 percent to 115 percent (the multiplier translates local median home prices into the applicable limit), the 2014 limits also include a change in the baseline year for some areas with respect to home prices.
While it may be debatable among lawyers whether this baseline change was required, it is clear that the new limits will have significant, negative impacts. The following map charts the scale of the declines by county.
On the whole, the lower price limits will make it more difficult for first-time homebuyers to purchase a home, particularly in job producing high cost areas of the nation. This will reduce housing demand and slow the recovery in housing, especially among younger prospective buyers who are seeking to start their careers, get married and have children.
According to HUD estimates, 89 counties will see an increase in 2014, but 652 counties will experience a drop in the limits. California leads the nation with 54 counties seeing a decline. Nationwide, the HUD data indicate that by dollar share, 6.9 percent of 2013 FHA loans would not qualify under the new 2014 limits. Under this disqualification metric, states with at least a 10 percent drop include Arizona (18.2 percent), Nevada (14.7 percent), California (14.2 percent), Utah (13.6 percent), D.C. (13.2 percent), Massachusetts (10.3 percent), Florida (10.1 percent) and Hawaii (10.1 percent).
An analysis from the National Association of Home Builders from December indicates that more than 400 counties will see a loan limit drop of more than 10 percent relative to 2013 limits, and more than 100 counties will witness a drop of more than 30 percent. The NAHB tracking also noted that the counties seeing FHA loan limit declines tend to be high cost, which in turn implies dense concentrations of population. For instance, counties with declining loan limits include 58 percent of owner-occupied homes in the nation, although most of these homes are not in the affected price ranges. Nonetheless, these are large markets, and declines in demand can have spillover effects that ripple through the housing market.
While some of the 2014 loan limit declines are mandated by housing policies that are now expiring, and thus were expected, the scale of the declines in loan limits in some areas is so large that prudence and caution suggests that, at the very least, they could have been phased-in over a number of years to minimize the impact on key segments of housing demand. However, as it stands now, the 2014 decline in loan limits represents yet another obstacle for younger households, who continue to lag other age groups in terms of the recovery in housing.
Robert D. Dietz is an economist with the National Association of Home Builders. Previously an economist with the Congressional Joint Committee on Taxation, Robert writes on housing and policy issues at NAHB's Eye on Housing blog and @dietz_econ on Twitter.