From the WSJ:
At the New Haven housing development in Ontario, Calif., Brookfield Residential is building 189 townhomes priced below $378,000.
So far, the moderately priced homes have sold at nearly twice the rate of others listed above the $378,000 mark.
That isn’t an arbitrary price. It marks the upper limit for a buyer to qualify for a low-down-payment, federally insured mortgage in Southern California’s Inland Empire, the suburban expanse east of Los Angeles.
Such mortgages, known as Federal Housing Administration loans, have become a primary vehicle for first-time buyers and those rebounding from the housing crash who have less-than-stellar credit and lack the 10% to 20% down payment required for most conventional mortgages.
Builders and developers in many higher-cost housing markets still recovering from the bust—including the Inland Empire, Las Vegas, Sacramento, Calif., and Phoenix—say the price limits set by the federal government make it nearly impossible to deliver homes that cater to buyers looking to purchase with FHA loans.
“It’s basically put a lid on the market,” said Michael Maples, co-founder of Trumark Cos., a California builder and developer. “For builders, if you’re above that FHA limit your buyer pool is significantly lower.”
The challenge is particularly acute in California, which has the nation’s highest upfront fees for new construction, according to housing-research firm Zelman & Associates. Fees to pay for roads, sewers, schools and other infrastructure in California markets average between $40,000 and $72,000 per home, according to the firm’s research, compared with an average of $2,600 in Houston.
“If you have a million-dollar house it’s easy, you can just pass the cost along to the consumer,” said Ivy Zelman, chief executive of Zelman & Associates. But for entry-level homes, “with all the fees they’ve been asked to pay, it’s almost impossible for them to make money,” she said.
After 2013, the FHA also changed its loan limit formula to reflect home values after the downturn, causing the loan limits to fall in 44% of metropolitan U.S. counties, according to an analysis by the Urban Institute in 2014.
Loan limits in California’s Riverside and San Bernardino counties dropped from $500,000 in 2013 to about $355,000—a nearly 30% decline overnight. In Clark County, Nev., home to Las Vegas, loan limits fell from $400,000 to $287,000.
New home sales in the Inland Empire plummeted by more than 30% in the first half of 2014 from the same period a year earlier, according to housing data firm Meyers Research, while sales in the Las Vegas area fell by more than 45%.
Officials at HUD argue that pegging loan limits to median home values is the fairest way to ensure buyers can afford the loans. But critics say limits imposed across an entire metropolitan area fail to account for vast differences within a market.