Mark Fleming, housing expert and chief economist at First American Financial (FAF), is going on the record and saying that the housing market has recovered. 

His reason: Having to adjust the Federal Housing Finance Agency loan limit for inflation is one very strong sign that we’re in a recovery. 

The FHFA will soon decide whether it will increase the conforming loan limit of Fannie Mae and Freddie Mac.  The conforming loan limit is currently $417,000. This was last confirmed in November 2014. And in Fleming's opinion, the loan limit is about to rise.

Here are the 3 steps to Fleming’s conclusion:

1. The GSEs are only allowed to securitize loans at or below the conforming limit. 

2. The GSE conforming loan limit can rise with house price inflation, but cannot fall in the event of any house price depreciation. 

3. This means that GSE market coverage effectively expands in times of stress (when prices are falling), and is inflation-adjusted in times of rising house prices. 

And here is Fleming’s full take: 

“While the debate continues about reducing the role and market share of the GSEs in the housing market, my expectation is that we will increase the market share of the GSE with an inflation-adjustment to the loan limit of almost 3% next year. Without the inflation-adjustment, over time the market share would decline without any further legislative action required. Has the housing market recovered? Having to adjust the FHFA loan limit for inflation is one very strong sign that it has.”

“Using the proposed 'expanded-data' FHFA house price index, year-over-year appreciation from the third quarter of 2014 to the third quarter of this year of approximately 2% would have been sufficient to surpass the price level used to set the current loan limit of $417,000. We estimate that the index will likely report a 5.5% increase year-over-year in the third quarter. Based on the HERA mandated formula, the conforming loan limit will increase almost 3% to a new overall limit of $429,000.”