Jumbo Mortgage Rules Impact Phoenix Real Estate Sales

Yesterday I wrote about Months of Supply, to get you ready for today’s topic (and you are a subscriber, right?). With months of supply in mind, recently I’ve begun to look more closely at certain price range bands for different parts of the Valley, and some interesting things popped out.

The number in the sold homes column is total sales for the last 6 months. More of those sales occurred in recent months, however with such small numbers, I didn’t want to limit the data to sales in the last 30 days, which skews the data a bit. However, because there are more sales recently than in the first few months of the sold period, these months of supply numbers will be higher than those shown in my weekly market update.

As you can clearly see, home owners in Glendale that are attempting to sell their home for $500K-$600K are in for a long wait. Nearly a 4 year wait, if the last 6 months is any judge. Yet the owners of a sub-$400K home are selling their homes comparably much quicker. Why is there such a big disparity?

I believe the reason we see the dramatic differences in the number of home sales in most parts of Phoenix above $500K has to do with the cost of getting a jumbo mortgage as compared to a conventional or FHA mortgage. Suspecting this to be the case, I contacted the Arizona Mortgage Guru and put the question to Shailesh and Aimee: What are current mortgage rates for a 30-year fixed loan, 30-year FHA loan, and 30-year jumbo mortgage loan?

The answer came back, with many caveats and qualifiers, that the very best qualified buyers could get a 30-year fixed mortgage for 6.5%, an FHA buyer could also get in for 6.5% (although they are paying mortgage insurance of 1% of the loan amount), and a jumbo buyer could get a loan for 7%. However, they found only one jumbo loan program that offered a 7% rate, and it was a very new program. Shopping around they found jumbo rates are typically in the range of 7.5%-8% for a jumbo loan. And those are for full documentation, 20-25% down jumbo loans.

Thus, the mortgage costs for a home that needs a mortgage of over $417,000 is substantially higher than the mortgage costs for a home that can be mortgaged for under $417,000. As well, the jumbo rules are stricter than conventional loan rules. The down payment being a big factor in establishing the rate, and even qualifying for the loan. 10% down jumbo loans are few and far between. Typically, the requirement for a jumbo loan is to have 20% down, which on $600K is $120K cash (plus closing costs) that the buyer needs to have. If that cash is no longer found in the equity of the home they are selling, they can’t be buyers of this more expensive home.

In Scottsdale, we see that while months of supply increases with price, it isn’t as much. FYI, this type of increase is historically normal. It’s common for there to be a mild increase in months of supply with higher prices, but only a mild increase, not the exponential increases we see in other sub-markets. I believe this has to do with the fact that Scottsdale hasn’t seen as much of a price decline as the other cities, and as a result there is more equity for buyers to use to move-up with. As well, Scottsdale attracts wealthier buyers in general, and has some resistance to the jumbo loan challenge of 20-25% down payment.

The good news, is that recent policy changes by Fannie Mae are making new more affordable loan programs available for people that need more than $417,000, but don’t want to pay 2 arms and a leg to get it. I expect that as buyers learn about these programs (why not give Shailesh and Aimee a call?) the statistics will begin to improve for this price range of homes that have a need for jumbo money.

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