Home prices continue to climb, but the U.S. government is keeping a lid on the size limit for federally backed mortgages, posing problems for home buyers in many pricey markets.

The Federal Housing Finance Agency on Wednesday said mortgage-finance giants Fannie Mae and Freddie Mac in most markets next year can back only loans of $417,000 or less. It will mark the 11th straight year that limit has been in place.

The highest-cost areas, which include cities such as San Jose, Calif., San Francisco and New York, will keep a limit of $625,500, while 39 counties will see increases of $5,750 to $34,500.

In the first nine months of the year, so-called jumbo mortgages—those that exceed the government limits—made up nearly 19% of the market, according to trade publication Inside Mortgage Finance. That was up from a low of 5.5% in 2009 and is the highest market share since the government last raised the loan limit in 2006.

In most parts of the U.S., where the median home price is $219,600, the federal mortgage limit isn't an issue. But in some California cities and others with fast-rising home values, the limit is starting to weigh on the market, real-estate agents and economists say.

"If we don't get an increase in the high-cost loan limit, it's going to be very disappointing," said Leslie Appleton-Young, chief economist for the California Association of Realtors, before the new limits were announced.

The biggest 2016 limit increases in dollar terms occurred in the Denver area, where home prices have risen 11% in the past year, according to S&P Case-Shiller. Many counties around Nashville, Tenn., also will see increases.

Many hot housing markets in California hit the maximum $625,500 limit before this year and as a result have seen more borrowers turn to jumbos.

More than half of San Jose's for-sale listings in September have asking prices that would require a jumbo loan assuming the borrower made a 25% down payment, according to an analysis for The Wall Street Journal by real-estate information site Zillow. The same could be said for about 44% of listings in San Francisco, 36% in Los Angeles and 35% in San Diego.

Outside of California, about 28% of listings met those criteria in the Miami-Fort Lauderdale and Denver metros as well as 23% of listings in Austin, Texas.

For most buyers, moving from a government-backed mortgage to a jumbo doesn't result in a big hit on interest rates. Wells Fargo Corp. on Tuesday, for example, advertised a 30-year fixed-rate mortgage rate of 4.125% or slightly higher for government-backed loans and 3.75% for jumbos.

Instead, the hurdle for many borrowers is the higher qualifications that can come with getting a jumbo mortgage. While Fannie and Freddie allow for a down payment of as low as 3% in some circumstances, many jumbo lenders don't allow a down payment below 10% or 15%. A borrower's credit score also typically has to be higher when he or she gets a jumbo.

Mathew Carson of mortgage broker First Capital Group in San Francisco, said nearly four out of five home buyers he works with now need a jumbo mortgage, up from less than half of borrowers five years ago.

Mr. Carson said buyers in his area, who often come from the high-paying tech industry, frequently have the income to pay a jumbo loan but don't have the large down payment or six to 12 months of mortgage payments in reserves that the loans require.

"You can't find anything decent in San Francisco for under a million bucks. With 20% down, you're at $800,000. That's not even close to the conforming limit," Mr. Carson said.

Jumbo limits traditionally have been a way to limit the government's role in the mortgage market. In 2005, before the Fannie and Freddie limit was last raised, jumbos started above $359,650 and represented more than a fifth of the market.

During the downturn, as private capital dried up, Congress and regulators expanded Fannie's and Freddie's role, establishing a temporary high-cost limit of nearly $730,000 while also ensuring that the nationwide limit of $417,000 didn't fall even as home prices tanked.

The FHFA in 2013 considered lowering limits, but backed off after intense pressure from Congress and industry groups. So instead borrowers have needed to wait for home prices to rise above the boom-era level to create justification for another increase.

The jumbo market's share "is remarkably close to where we've been historically," said Guy Cecala, publisher of Inside Mortgage Finance. "I don't think anybody would say the governmental footprint needs to be any larger now."

Some in the real-estate industry say certain locales face more pressure.

Land developer and homebuilder Brookfield Residential in some California communities has held back from developing homes at higher price points because company officials know potential buyers would have trouble qualifying for a loan backed by Fannie, Freddie or the Federal Housing Administration, which has its own loan limits, said Adrian Foley, chief operating officer for Brookfield's California region.

"It just gets worse over time as conventional mortgages don't follow the market," said Mr. Foley. He added that some communities just miles apart can have very different mortgage standards because they're on opposite sides of a county border.

In San Bernardino County, for example, borrowers are capped at $417,000, while in neighboring Los Angeles County the limit is $625,500.

"It's night and day for the home builder," said real-estate consultant John Burns. "On one side of the line, he'll set a price point where he knows borrowers can use $600,000 conforming loans. On the other side, he can't."

Write to Joe Light at joe.light@wsj.com

 

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(END) Dow Jones Newswires

November 25, 2015 14:05 ET (19:05 GMT)

Copyright (c) 2015 Dow Jones & Company, Inc.
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