For wealthier Americans, the free-fall in stocks is not only ravaging their portfolios—it's taking a huge bite out of the value of their homes.
"The high-end market relies on equities," says Walter Molony, spokesman for the National Association of Realtors. "If stocks are doing well, so too does high-end housing."
Though only 2 percent of the overall housing market, high-end home volume sales have seen a dramatic drop, according to Molony. Homes valued at $750,000 or more plunged a whopping 47 percent in the year ended in November. By comparison, sales of homes valued at $400,000 or less fell by only 3 percent during the same period.
A look at the markets during the same time period shows the Dow Jones fell 33.1 percent, while the S&P shows a 37.5 percent drop in value.
Real estate professionals agree that sliding markets and a ravaged economy are hurting prospective high-end buyers and sellers. And that means prices will likely decline even more before there is any recovery.
"Unless they are forced to move, they are staying put," says Mary Cassidy, a licensed real estate broker in Bronxville, New York, a wealthy suburb of New York City that is home to many Wall Streeters. "People are not buying and people are not selling. When everyone’s uncertain as to whether they have a job, why go out and buy something?"
While equities and the economy are reasons for slower sales, the rise in jumbo loan rates is another, says Greg McBride, Senior Financial Analyst at Bankrate.com. "More money down is the big reason people aren't taking them out," McBride says. "It takes good credit but you need 30 percent down or more and even those people are paying an interest rate of more than 7 percent."
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Bob Walters, Chief Economist at Quicken Loans also sees fewer jumbo loans being made. "Down payments have to be higher, credit scores have to be higher," says Walters. People are getting hit hard from all sides and there's less demand for more expensive homes."
By nature, jumbo loans, or non-conforming loans are used for financing high end homes. They are a mortgage with a loan amount above the industry-standard definition of conventional conforming loan. A loan in excess of $417,000 to $625,000 is currently considered a jumbo in most states. And jumbos have interest rates a little higher than a conforming loan.
But those interest rates have gotten even higher over the past few months, which is a direct result from the lack of a secondary market to purchase jumbo loans says Gary Meglino, a corporate executive at Residential Home Funding in White Plains, New York.
"The secondary market lost interest in acquiring the loans about May or June of 2008," says Meglino. "The only institutions that are offering jumbo loans have to service them, and that has made them very expensive."
Bigger Problem Behind Jumbo Loans
In February of 2008, then-President Bush signed an economic stimulus package that increased the conforming loan limit to $729,750. But that only lasted until the end of 2008 and caused a bigger problem for jumbo loan applicants says Bankrate's McBride.
"Conforming loan limits declined beginning in 2009," McBride says. "What that means is that in high cost housing markets, you have a lot more borrowers that are considered jumbo and can't get rates for a lower loan. The conforming loan limit should go back to the 2008 level, when it was higher. In New York it was the $729 thousand figure. It's now at the high end of $625,500. That could increase foreclosures."
Foreclosures For High End Homes?
In the past, foreclosure rates have been much lower on jumbo loans in comparison to conforming loans. But jumbo's are a higher risk for lenders, because if the jumbo loan defaults, it's harder to sell a home, especially a luxury home. for its full price. And that could be a problem if there are more foreclosures ahead.
"I think the best thing is to re-invigorate the banking system, and let it work itself on its own," says Quicken's Walters. "It's not a good policy for the government to buy million dollar homes," when asked about what's the best solution if jumbo loan foreclosures mount in the wake of higher unemployment.
Future Of High End Market
As the markets continue to decline and home values erode at record lows, the future for high end sales looks fairly bleak at least for now, says Bronxville, NY's Cassidy.
"Lower prices are not moving people to buy," Cassidy says. People say, 'I have what I need, why do I need more.' We're not seeing may sales with jumbo loans. People are scared about the economy. The high end here is more than $2 million. There's no market for them. It's a lot of hand holding for sellers. Our work is even tougher."
But Residential Home's Meglino does see some hope for home buyers with enough cash. "Jumbo's are harder and more expensive," he says, "but for people who need a mortgage, there's always someone there with a price."