Monday, December 03, 2007

Fannie Mae Conforming Limit: Then and Now

There was some discussion in the comments about whether the lower number of house sales in the Sacramento Area represented a "return to normal", as it were, or an unusually low number of sales. Darth Toll then postulated that 2001 should have been a normal cycle peak, but then a bubble formed that drove prices to the stratosphere.

I remember several discussions at the time focused around the Fannie and Freddie, and how raising the conforming limit kept the punch bowl filled with money for the manic buyers. Once the scandals broke and GSE lending slowed, many believed the bubble would deflate. That turned out to be a false hope, as the hedge funds and investment banks stepped in with piles of dumb money looking for any return.

But before the hedgies, there was Fannie and Freddie. One thing that drove the Bubblesphere nuts was the fact that the GSEs conforming limit kept rising, even as prices rose. Fannie and Freddie seemed to be encouraging the bubble, which ran counter to their mission to provide "affordable housing". Yet as I searched down memory lane (ain't the web grand?), I couldn't seem to find any data illustrating the changes in the conforming limit, and how it might correlate to the bubble house prices. So, I made one:

Limit data taken from Fannie Mae (pdf), CPI data from the BLS. CPI adjusted to 2007 dollars.

That sure looks like the familiar bubble graph we all know and love. I am no macro economist, so can someone explain this to me? Did increasing the conforming limit encourage the bubble, or were the GSEs simply chasing the market upward?


Buying Time said...

Wow....really nice work Max. I had read a while back an editorial in the WSJ blaming Fannie and Freddie for the housing mess....and I thought it was pretty ridiculous at the time. But after seeing this graphic they certainly played the role of enabler.

Patient Renter said...

From a comment at HBB:

"Mozilo is begging Freddie & Fannie to socialize the risk [remove/raise caps] to he can go back to privatizing his profits."

This is exactly the problem.