The Washington Post Still Has Not Heard About the Housing Bubble

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Monday, 27 June 2011 04:53

A Post article on the possible effects of lowering of the loan limit for Fannie and Freddie backed mortgages said this could hurt the "faltering" housing market, pushing prices down further. Of course the current price decline is simply the deflation of a bubble. Nationwide prices still have to fall by around 10 percent to return to their trend level.

The piece is also somewhat confused on the effect that lowering the limit would have. It tells readers that:

"The loan limit [the new limit of $625,500]— down from $729,750 — would have affected about 40 percent of mortgages made in Great Falls if it were in place last year and more than 20 percent of the loans made in expensive areas such as Bethesda, McLean, Chevy Chase, Dunn Loring, Potomac, Fairfax Station and Upper Northwest Washington, according to a Washington Post analysis of data from LPS Applied Analytics."

Many homebuyers would take advantage of the opportunity to borrow up to the limit when buying a new house because they can get a low interest rate. If the limit were lowered, many of these upper income homebuyers would simply arrange to put up a larger downpayment. In other words, the limit is likely a major factor determining the size of the mortgage.