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The New Market For 700000 Houses

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by Felix Salmon
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Feb 25 2008 12:00am EDT

The New Market for $700,000 Houses

Now that Fannie and Freddie can buy jumbo mortgages up to $729,750, there's new demand for houses up to that range. Dean Baker thinks the demand isn't likely to be enormous, however:

The law as it is written is time-limited. If the ability of these institutions really would in principle have a large effect on the price, then home buyers should be reluctant to pay much more for a home if they believe that the higher caps are temporary. These buyers would realize that they would be selling their home in an environment in which it will be above the caps in place at the time, and therefore would command a lower price. In that case, potential home buyers would adjust their offers accordingly.

My view is that the fact the new cap is temporary will actually have less of an effect on home prices than Dean thinks. If home purchases were speculative, then his logic would be impeccable. But they're not. People aren't buying houses because they think they can sell them for more money down the pike; they're buying houses because they can afford them.

The market in houses is really very simple: sellers sell for the highest dollar price they can get; buyers, on the other hand, look much more at monthly costs than they do at total dollar price. Might they step a little more warily if they think prices are going to go down in future? Maybe - but that's a second-order effect.

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