October first brings new limits on the conforming loans for Silicon Valley. It used to be that conforming loans would be at the rate of 125% of the median home price of the county, but that was to be temporary and eventually drop back to 115% of the area rate. That’s what has happened now. The conforming loan rate has dropped throughout Silicon Valley (Santa Clara County, San Mateo County, Alameda County, Santa Cruz County) from $729,750 to $625,500. This is true for most of the San Francisco Bay Area.
Some counties have been harder hit than others during the economic downturn and housing crisis. While the San Jose, South Bay and Peninsula areas saw a loss in the conforming rates of $104,250, in Monterey County it is much worse. They have gone from $729,750 down to $483,000 – a whopping $246,750 drop. The same is true in Napa. Alternatively, some of the really rural California counties saw no drop in this rate at all: Plumas, Humbolt, Siskiyou, Tehama, Tulare, Fresno and several other more agricultural counties saw no change at all.
How does this financing change impact you?
For properties under the conforming rate, there should be little impact that I can predict. So too for very expensive or luxury properties – this should not change anything. But for more houses or condos in between, particularly where the 80% loan to value limits are caught in the crossfire of this change, between about $780,000 and $912,000, it could be significant because higher interest rates impact buying power. Let’s look at an example.
If your home, or the one you want to purchase, requires a loan of $700,000, it will now be a jumbo loan rather than a jumbo-conforming loan. The interest rate could be small or large, depending on many factors, but often it’s about .5% and 1 full point or percent of the loan. The jumbo loan for people with good credit will be at about 4.75% but at the conforming rate (say, $600,000) the rate could be closer to 4%.
That $700,000 loan for 30 years at 4.75% is a monthly payment of $3651.53. The same loan at the conforming rate of 4% results in a payment of $3341.91, about $310 per month difference or about 9%.
For home buyers purchasing in this price point, just over the conforming limit, in essence home buying just got more expensive in their range. For some it may be a small change and for others it may be a deal breaker.
Right now we have low inventory and strong demand – it is a sellers market in many parts of Silicon Valley. Is the demand enough to keep prices from slipping in this tier of housing? Will the impact in this band of pricing trickle down – or up – to more or less expensive properties? We’ll have to wait and see.