I received an excitedly written email a day or two ago from a realtor about the new increase of the conforming loan limit. She was sure this would "turn the market around" allowing people to refinance into fixed rate loans and also allow all those "pent up" buyers to purchase some of the overpriced inventory. I normally just ignore these spam emails but I had to look into this one just to see if this might slow down the correction of prices.
Here's the deal. Before President Bushtard signed this legislation, the max loan Fannie and Freddie were allowed to buy was $417k. Anything more than that was considered a Jumbo Loan and the bank either had to keep that loan or try to sell it off to Wall Street. Because of the added risk of getting stuck with these loans the lenders are charging higher rates on Jumbo's. Most Jumbos are a percent or two higher than a conforming loan (under $417k). This is the rational behind the increase. If us buyers can get a lower rate then we are more likely to spend more. In other words they are hoping we buy an overpriced home.
The new legislation increased the limits to $729k in high cost areas. It seems we are saved thinks the Realtors. But wait, there is some fine print you need to read. The "Limit" is raised to "as high as $729k". Not $729k across the board. They peg the increase to the current HUD median price for the area you are buying in. It sets the limit at 125% of the current median price according to HUD. I'm not sure what HUD thinks the IE median price is but I know DataQuick thinks it's $315k. If we take 125% of $315k we get $393K. Hmm, exactly how is this going to help? Fortunately the old $417k limit still applies to us. If the HUD's median is higher than DataQuicks then we may see a slight increase. Don't count on it though.
It seems like this is just a lot of hot political air and it will not affect us in the IE one little bit.