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posted on 01 August 2015

Jumbo Loans, Jumbo Geography

by Zillow

-- the author of this post is Aaron Trerrazas, Senior Economist at Zillow

The share of pricy homes likely to be purchased with a jumbo mortgage has fallen in some of the nation's most expensive housing markets, and risen in some of the least expensive. Why this seemingly counter-intuitive trend? Chalk it up, at least in part, to higher conforming loan limits in expensive areas, and rapid home value appreciation in the traditionally more affordable markets.

Most homes in the United States can be purchased with a mortgage eligible for backing from Freddie Mac or Fannie Mae, known as a conforming loan. But these two agencies are prohibited from purchasing loans that exceed a certain amount, known as the conforming loan limit. Loans in amounts more than this threshold are known as jumbo mortgages, and are associated with higher costs. Prior to 2008, the conforming loan limit was the same nationwide, but legislation enacted during the financial crisis created special limits for more expensive communities.

When it comes to jumbo mortgages, California is inevitably the elephant in the room. The Golden State is currently home to 9 percent of the country's housing stock, but 32 percent of the country's homes that require a jumbo mortgage[i]. On the eve of the housing bust in 2007, the state accounted for more than half of all jumbo homes in the United States. With the introduction of higher conforming loan limits in 2008, the share of California homes that required a jumbo loan fell from 29 percent to 9 percent overnight.

Figure 1 shows each state in the United States sized according to its current share of all homes (left), and its share of jumbo homes (right).


Among the nation's largest 100 metros, San Jose in California's Silicon Valley currently has the highest share of jumbo homes: 56 percent of the metro's homes would likely require a jumbo loan, as of the end of the second quarter. San Francisco (41 percent); Honolulu (25 percent); Stamford, Connecticut (25 percent); and Los Angeles (22 percent) round out the top five.

In all of these metros, the share of homes that require a jumbo loan is actually well below pre-bubble levels - largely because of the introduction of higher conforming loan limits during the recession. Compared to the average share of homes in the metro that required a jumbo mortgage between 1998 and 2003, the jumbo share of homes in San Jose is 21 percentage points lower (56 percent versus 77 percent).

But the jumbo share of homes is higher than pre-bubble levels in historically less expensive communities, where prices have recovered strongly from the crash. The share has increased most in Miami (currently 13 percent versus 8 percent historically), Riverside (8 percent versus 4 percent), Charleston (11 percent versus 7 percent), Austin (9 percent versus 5 percent) and Houston (6 percent versus 3 percent). Sarasota, Denver, Portland (Oregon), Provo and Tampa round out the top ten metros for increases in the share of jumbo homes (figure 2).

[i] To calculate the share of homes that would require a jumbo loan, we assume that a homebuyer provided a 25 percent down payment, in line with the average down payment sought for jumbo loan inquiries on Zillow Mortgages.

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