The federal government will be backing mortgages of more than $1 million for the first time next year.
In 2023, mortgage giants Fannie Mae and Freddie Mac will be able to purchase mortgages up to $1,089,300 in certain high-cost areas in the United States and up to $726,200 in the rest of the country, the Federal Housing Finance Agency announced Tuesday.
The conforming loan – a mortgage that meets the dollar limits set by the Federal Housing Finance Agency – will be $726,200 for one-unit properties in 2023, an increase of $79,000 from $647,200 in 2022. The increase mirrors rising house prices, which went up 12% from September 2021 to September 2022, according to the agency.
In certain high-priced counties in states including New York, New Jersey, California and Virginia, the conforming loan limit will jump from $970,800 to $1,089,300, or up 150% of the baseline loan limit of $726,200, making housing more affordable for homebuyers.
However, house prices have only had a moderate increase this year as mortgage rates have climbed. The agency’s seasonally adjusted monthly index for September was up a modest 0.1% from August.
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“House prices were flat for the third quarter but continued to remain above levels from a year ago,” said William Doerner, Supervisory Economist in housing finance agency’s Division of Research and Statistics. “The rate of U.S. house price growth has substantially decelerated. This deceleration is widespread with about one-third of all states and metropolitan statistical areas registering annual growth below 10%.”
Fannie Mae and Freddie Mac are so-called government-sponsored enterprises that were placed under conservatorship in 2008 at the height of the financial crisis. The companies don’t make home loans, but buy them from banks and other lenders, bundle them into securities, guarantee them against default and sell them to investors. Because the companies are under government control, investors are eager to snap up the “safe” securities.
And because Fannie and Freddie stand behind nearly half of U.S. home loans, they’re important to homeowners and potential buyers.
Why is the U.S. government planning to backstop mortgages over $1 million?
The Housing and Economic Recovery Act requires that the baseline conforming loan limit for Fannie Mae and Freddie Mac be adjusted each year to reflect the change in the average U.S. home price.
On Tuesday, the agency published its third quarter 2022 FHFA House Price Index report, which includes statistics for the increase in the average U.S. home value over the last four quarters, showing that house prices increased 12.21%, on average, between the third quarters of 2021 and 2022. Therefore, the baseline conforming loan limit in 2023 will increase by the same percentage.
How much did home prices rise?
Home prices rose in all 50 states and the District of Columbia between the third quarters of 2021 and 2022, according to the report. The five areas with the highest annual appreciation were: 1) Florida 23%, 2) South Carolina 18%, 3) Tennessee 18%, 4) North Carolina 17% and 5) Georgia 17%.
The areas showing the lowest annual appreciation were: 1) District of Columbia 2%, 2) Oregon 8%, 3) California 8%,; 4) Minnesota 8% and 5) Louisiana 8%.
Where did home prices fall?
Two metropolitan areas that experienced price declines are the San Francisco-San Mateo-Redwood City area and Oakland-Berkeley-Livermore area in California, where prices decreased by 4.3% and 0.6%, respectively.
Can raising the loan limits worsen affordability?
Crossing the million-dollar threshold should cause Congress, the Biden Administration, and all other stakeholders to actively consider the appropriate role of the government in the housing finance system, according to the Housing Policy Council.
“House prices have grown much faster than household income, in large part due to supply constraints and low-cost financing,” the council said in a statement. “Taxpayer backing of ever-increasing loan sizes provides a subsidy that results in slightly lower mortgage rates which, in turn, encourages people to buy more expensive homes.”
Ultimately, such backing feeds the runup in house prices, exacerbating the affordability challenges we face in today’s supply-constrained marketplace, the council added.
Swapna Venugopal Ramaswamy is a housing and economy correspondent for USA TODAY. You can follow her on Twitter @SwapnaVenugopal and sign up for our Daily Money newsletter here.