The U.S. government is set to enhance its support for homeownership as property prices continue to climb, posing challenges for potential buyers.
Starting in 2025, Fannie Mae and Freddie Mac, the government-sponsored mortgage guarantors, will increase their backing for mortgages to $806,500, a boost of 5.2%, announced by their overseeing regulator on Tuesday. With an estimated 20% down payment, this means homes priced close to $1 million could qualify for these loans. This development marks a significant point in the housing market, which is increasingly split between homeowners and those trying to enter the market.
Molly Goodman, co-founder of Abundant Housing Massachusetts, a housing advocacy group, believes this adjustment by Fannie and Freddie is a practical approach to current market conditions. “We still need financial products that can serve the market, but we need to recognize that this is not sustainable,” Goodman stated.
Understanding Fannie Mae and Freddie Mac
Fannie Mae and Freddie Mac do not issue loans directly. Instead, they purchase mortgages from financial institutions like banks. This process enables lenders to issue more loans by providing a reliable means to sell them.
The Federal Housing Finance Agency (FHFA), which regulates these entities, updates the “conforming loan limits” annually. These limits define the maximum size of loans Fannie Mae and Freddie Mac will purchase before borrowers must turn to more complex and restrictive jumbo mortgages.
“Raising these loan limits helps significantly. It simplifies the process, particularly for us as lenders,” remarked David Horvath, vice president and senior mortgage loan officer at Meridian Bank. He explained that mortgages supported by Fannie and Freddie are more flexible regarding down payments and credit profiles than jumbo loans.
Government Ties with Fannie and Freddie
Since the 2008 financial crisis, Fannie Mae and Freddie Mac have been under federal conservatorship. They are connected to the U.S. Treasury, which supports them financially, and in return, they pay the government a quarterly dividend. This arrangement ensures that the Treasury will provide support if they face insolvency.
The FHFA’s annual adjustments to loan limits are based on the annual increase in home prices, according to their own tracked data. From the third quarter of 2023 to the same period in 2024, their home price index rose by 5.21%, hence the loan limits will also increase by the same percentage. In regions where living costs are higher, the limits are even greater and continue to rise each year.
Forecast for Home Prices in 2025
CoreLogic’s chief economist, Selma Hepp, predicts that home price growth will decelerate in 2025, largely due to high mortgage rates dampening buyer demand.
“It’s astonishing that home prices continue to rise at this rate, given the current unaffordability,” Hepp noted. She explained that the ongoing price increase is fueled by substantial home equity among existing homeowners and considerable wealth among baby boomers, many of whom help their children with down payments.
Census data reveals that nearly 40% of American homeowners own their homes outright, having either paid off their mortgages or purchased their homes with cash. This is the highest percentage in more than a decade.
Despite challenges, Hepp believes it remains worthwhile to pursue homeownership. “I’m frequently asked if now is a good time to buy. Apart from the few years starting in 2005 with the subprime mortgage bubble, it has generally been a good time to buy,” she said. “Anyone who bought after 2010 has seen significant equity gains. Even though the market is more challenging now, home prices continue to rise.”
Solutions for More Affordable Housing
Many advocates, including Goodman, argue that the most significant obstacle to more affordable housing is the insufficient supply, which drives prices up. Addressing this issue is more about increasing housing supply than making mortgages easier or cheaper to obtain, which only tackles demand.
Goodman emphasized the federal government’s potential role in this area. “The federal government’s involvement is primarily financial,” she stated. “By attaching conditions to the funds they distribute to local governments, they can effectively encourage more housing production, which could help stabilize or even reduce home prices.”
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Passionate about analyzing economic markets, Alice M. Carter joined THE NORTHERN FORUM with a mission: to make financial concepts accessible to everyone. With over 10 years of experience in economic journalism, she specializes in global economic trends and US financial policies. She firmly believes that a better understanding of the economy is the key to a more informed future.