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New Conforming Loan Limits Offer Upside to Specific South Bay Markets

The Federal Housing Finance Agency (FHFA) announced last week that it was raising loan limits for Fannie Mae and Freddie Mac loans.

South Bay real estate is so expensive relative to most of the country that we are used to seeing jumbo loans on a lot of our purchases. High conforming loans certainly happen with regularity, but rarely are they newsworthy to our local market.

This time around it is newsworthy! So, why should you care?

Potential owner-occupied buyers and owners of homes in specific sub-markets of the South Bay have a chance to collect some easy gains.

By my calculations, we could see a rise of close to $71,000 in prices very easily and quickly if you know where to look.

Some Past History

Back during the Great Recession, Congress was doing anything in its power to stimulate the economy and housing market.

The Economic Stimulus Act of 2008 was designed to increase the availability and affordability of mortgage in “high cost” areas.

The result of this legislation is something I will never forget when I was just a young mortgage broker straight out of undergrad. It allowed for high-cost loans in the Los Angeles region to jump. Further, any local housing market that fit into that new loan limit really felt the benefit of the Fannie and Freddie loans.

For borrowers that can only afford 20% down, Fannie and Freddie loans almost always offer the best rates around. So you can imagine that if the loan limit is raised and ultra-low rates can still be had, then that creates a bullish effect for certain markets.

I saw it happen when the stimulus was passed, and it is likely to happen again this time around.

Some Recent History

The “recent history” is that high-conforming loan limits in Los Angeles county in 2020 currently sit at $765,600. It has hovered around that number with inflation bumps over the past few years.

The new 2021 loan limit going into effect is giving those high-conforming loans a nice boost and jumping to $822,375.

This may not seem like a big deal, but let me show you why it is.

The Calculation

It has been well publicized that the most difficult hurdle of home ownership is coming up with the down payment.

If you are purchasing a home in an area where only a jumbo loan will do, oftentimes you need to come up with 30%, 35% or more to obtain the most competitive rates.

The Fannie and Freddie loans offer the same competitive rates with only 20% down and is the product of choice for home buyers struggling to save for their down payment.

Below is the simple calculation of the effects of the rising loan limit…

  • 2020 Buyer:
    • 20% down payment + max $765,600 loan = $957,000 purchase price
  • 2021 Buyer:
    • 20% down payment + max $822,375 loan = $1,027,968 purchase price

That is a difference of $70,968.

Why is this such a big deal and why is it so achievable?

There are two reasons:

  • Quite simply, buyers need 80% LTV Fannie or Freddie loans to make their payments affordable. Jumbo loans at 80% LTV are cost prohibitive.

  • Although most buyers struggle with a down payment, many do have the funds to front another $14,193 of additional down payment with the higher loan limit. They do not have the extra $100,000 lying around to land a 70% jumbo loan.

This small change in the high-conforming limits will most likely push markets that trade in the $957,000 range to the $1,027,000 range quickly and easily.

I do not care who you are but $71,000 is a lot of money and it is worth strategizing areas if you are investment focused.

If you are owner-occupied home buyer, below are areas where you can take advantage of this jump in loan limits.

Markets that will Benefit Most

There are plenty of properties that trade around $950,000 in the South Bay.

Those should be your target properties as they will benefit the most by being at the top of the loan limit.

North Redondo Townhomes in the Villas

North Redondo’s Villas have a plethora of townhomes that come on the market each year for around $950,000. These townhomes have major potential to benefit from the higher balances right away.

Based on 2020 sales, there will be around 20 options throughout the year for buyers to jump on with the Grant listing above being a great example.

Huge Areas of Torrance Single-Family Homes

Torrance is a massive city, and it is affordable relative to the beach and Palos Verdes. If you want a single-family home around $950,000 to take advantage of the new loan limits, then this is your town.

There are too many listings to comment on but based on 2020 sales, there will be around 100 single-family home options in the coming year that will be perfect to land a $950,000 deal and catch the $70,000 jump thanks to new buying power.

Eastview/Rancho Palos Verdes Single-Family Homes

If you want the fabulous Palos Verdes school system, then the most affordable area on The Hill will offer homes around $950,000 about once a month. This is the Eastview/Rancho Palos Verdes neighborhood.

This was a four bedroom sale that occurred earlier in 2020 which is a bullseye home ripe to benefit from increased loan limits.

Holly Glen/Del Aire Single-Family Homes

There is probably no hotter “up-and-coming” area outside the beach than the Holly Glen/Del Aire submarket of Hawthorne. West of the 405 and with a fabulous school district, many buyers have opted to buy in this neighborhood with homes around $1 million.

  • 5531 Wiseburn, Hawthorne
    • 3 bed, 1.5 bath, 1,345 sq. ft., 5,000 sq. ft. lot
    • Pending Price: $974,999

This property went to escrow earlier this month. Buyers will have around one shot per month based on sales from this year. Since this is already a hot market, this will be like rocket fuel to the area’s home values.

Conclusion

Just like the historic drop in interest rates have fueled the surge in buying power, these new loan limits will contribute additional growth in the neighborhoods that are at the top of the limit.

If you are a buyer, you should get in front of this positive effect now and go after a home around $950,000 ASAP. It’s a good bet that it can outperform other markets and jump above $1 million quickly.

If you are considering selling, and your property’s value is around $950,000, then be patient. Let buyers discover their newfound buying power and drive the market above $1 million. Hopefully, you can score another $70,000 in resale value simply with a few months of patience.

Cheers.

DRE: 01779425

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