What does this tell us? That at least half of the population of homeowners will continue to be able to continue to qualify for conforming loans. That leaves those no more than the other half of homeowners potentially being forced to obtain mortgages without the government's blessing. They would be the wealthiest 33% of Americans. In fact, it's probably an even smaller portion of the top than that, considering the generous approximations made above.
The question becomes: does the government really need to subsidize the mortgages of the richest one-third of Americans? It's hard to see why. Surely, these people will still be able to get mortgages without a government backing, either through a larger down payment or a higher interest rate. They can afford either.
In Many Areas, Prices Have Declined More Than the Limit Would Drop
The previous conforming limit was set in 2008 based on 2007 prices. Unless you've been in a coma for the past three years, you know that home prices have dropped significantly in many markets -- particularly many of the markets that boasted the highest prices in 2007.
In San Francisco, for example, from 2007 to 2010, the median home prices dropped from $804,800 to $567,900. I know, ouch. That's a 29% decline. Meanwhile, the conforming loan limit will fall from $729,750 to $625,500 -- a decline of just 14%. In other words, the average borrower is still better off with the new conforming loan limit than they were with the old one in 2008.
High-Priced Homes Are a Relatively Tiny Part of the Housing Market
The above analysis implies something else: there aren't all that many homes out there for sale that would even require mortgages in excess of the new conforming limits. You can see this clearly enough through the fact that median home prices have declined a lot more over the past three years than the conforming limit would.
You can also look at new home sales to get some idea of how few home sales would be affected by cutting the conforming limit. In 2010, just 15% of new homes sold cost more than $400,000. And many of these were likely in high-cost areas, where the limit would remain $625,500. The portion of the year's sales that were over $500,000 was just 9%. And remember, the vast majority of sales of more expensive houses would still occur, since these buyers can afford to pay a little more.
Higher Limits Won't Help First-time Buyers -- Or the Housing Market Recovery
The population who can do the most to help the ailing home market is first time buyers. They're the ones who can help to work through the massive housing market inventory. Current buyers will just create churn when purchasing new homes. Yet few first time buyers will look to purchase a home well above their city's median home price. After all, most people who could afford to purchase a relatively expensive home would have already done so years ago.