One of the Trump Administration’s first moves upon entering office on January 20th was to cut a fee reduction Obama had granted FHA loan borrowers. FHA loans are popular among first-time buyers because they allow lower down payments and less stringent credit requirements than traditional loans.
The Obama Administration reduced the annual fee from .85 percent down to .6 percent. This fee reduction would help low-income people by granting them premium savings of about $500 per year, assuming a 30-year $200,000 FHA mortgage. Buyers in California facing relatively high housing prices compared to the rest of the country will face even more expensive fees.
The chart below shows a few counties in California, the maximum FHA loan amount for that county, and the corresponding reduction in yearly premium savings after Trump’s decision to cut Obama’s fee reduction. Stanislaus and Merced counties are indicative of the larger Central Valley market, whereas the addition of Contra Costa County represents a core Bay Area housing market.
|County||Max FHA Loan Amount||Reduction in Yearly Savings from Trump’s Move|
Very few new homes in core Bay Area locations such as Contra Costa County are going to be available within the limits of an FHA loan with median home prices settling around $558,600. The markets in Stanislaus and Merced county are far more likely to be able to support the sale of new homes when you consider their median home prices of $260,700 and around $200,000, respectively.
As a rough rule of thumb, new homes tend to sell at about a 20 percent premium to resales. In theory, that means new home sales would hover a bit above $300,000 for Stanislaus County and around $240,000 in Merced County. Building a home that could sell within FHA loan limits is a dream for builders because it opens a whole new segment of buyers that would exclude if they had to put 20 percent down and get a conventional loan.
In practice, however, with sky-high construction and financing costs, especially for a project in an unproven market in the Central Valley, building a home cheap enough to sell to a buyer with an FHA loan is impossible.
So, while Trump’s move likely won’t have a direct effect on new home sales, it is concerning for the first-time home buyer who’s struggling to enter the market.
The U.S. Department of Housing and Urban Development (HUD) issued the following statement after the move:
More analysis and research are deemed necessary to assess future adjustments while also considering potential market conditions in an ever-changing global economy that could impact our efforts.
The statement says very little, but within the grand scheme of things, this isn’t an earth-shattering revelation. However, if we are to relieve the current housing affordability crisis, most critics say that increasing the burden on people who need these FHA loans is not the way to go.