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Adjustable-rate mortgages are more popular this summer than they’ve been since right before the Great Recession.
The share of mortgage applications for ARMs rose to 12.6% in June before they dipped to 12.2% in July, according to an analysis by Seattle-based Zillow Group Inc. (Nasdaq: ZG). It’s the first time since August 2007 the share of ARMs among mortgage applications has been more than 12%.
While that could trigger some alarm bells, the conditions today — including lending standards — are very different than the years leading up to the housing crash of the late 2000s, said Jeff Tucker, senior economist at Zillow.
“It’s something to keep an eye on but, at the moment, it doesn’t look concerning to us,” Tucker said. In the years leading up to the pandemic, ARMs generally made up less than 10% of the overall mortgage-application market, he said.
ARMs offer lower rates during an introductory period of three to 10 years before adjusting to the market at a predetermined time. Tucker said some buyers are choosing ARMs because interest rates were recently so low before their quick ascent this spring, and it’s not certain where rates will be in five years, when the rate for a 5/1 ARM loan — a common type of 30-year ARM — would adjust.
Despite the chance for an eventual higher rate with an ARM, the risks aren’t the same as, say, subprime mortgages key to the housing-market meltdown in 2008 because of tighter lending standards, Tucker said.
But, according to home mortgage data from 2021, ARMs these days are generally going to borrowers making bigger down payments on more expensive homes, rather than buyers who can’t afford to get a home on a 30-year fixed rate loan and who may be at risk of a foreclosure down the line.
The median income of buyers who received an ARM loan was $165,000 in 2021, compared to $91,000 for all borrowers, Zillow found. The typical ARM borrower put 23.6% down while the typical borrower overall put down 10%. The median home value among ARM borrowers was $565,000, as compared to $325,000 across the overall market.
He said the reasons for the current housing-market slowdown are also different now than they were in 2008. It’s coming from the demand side of the issue — affordability has prompted some buyers to press pause — as opposed to the supply side, which was the case in the late 2000s amid a wave of foreclosures.
“If buyers are feeling like prices are a little too far out of reach, as things cool down, it’s self-limiting,” he said. “We’ve begun to see sellers are also opting out … I’m not going to list my house if I’m hearing it’s a bad time, (which) prevents a runaway glut of housing on the market.”
What may be concern for borrowers, especially amid a high-inflation environment, is their debt-to-income ratio, Tucker said. Issues may arise if borrowers try to stretch that ratio outside of qualified-mortgage boundaries but, he continued, he’s not seeing riskier, non-QM financing mechanisms coming back.
Mortgage-application activity overall has slowed, corresponding with higher interest rates and, in many places, continued home-price appreciation. Mortgage applications the week ending Aug. 19 decreased 1.2% from the week prior on a seasonally adjusted basis, and were 21% lower than the same week a year ago, according to the Mortgage Bankers Association’s weekly mortgage applications survey.
Notably, ARM share of activity decreased, to 6.5% of total applications, the week ending Aug. 19, compared to the higher shares observed earlier in the summer. Joel Kan, MBA’s associate vice president of economic and industry forecasting, in a statement said the spread between conforming fixed-rate and ARM loans narrowed to 84 basis points, as compared to more than 100 basis points observed the week before.
“This movement made fixed-rate loans relatively more attractive than ARMs, thereby reducing the ARM share further from highs seen earlier this year,” Kan said.
Housing inventory across the country rose for the third consecutive month in July, as active listings were up 30.7%, according to a Realtor.com report.
The report highlights that while buyers had nearly a third more for-sale home options in July than in the previous year, competition remained in favor of sellers, with listing prices near all-time highs and homes selling faster than before the start of the pandemic.
“The U.S. housing market continues to move toward more evenly balanced supply and demand compared to the 2021 frenzy,” said Danielle Hale, chief economist for Realtor.com, in a release. “Our July data shows elevated mortgage rates left many buyers tightening their budgets and sellers responding with price reductions, while home shoppers who kept searching saw more available options.”
Despite the rise of active listing, the data shows that competition remained largely in sellers’ favor, with listing prices near all-time highs and homes selling more quickly than before the pandemic.
The U.S. median listing price in July came in at $449,000, just $1,000 shy of June’s all-time high but up 16.6% year-over-year.
On a square-foot basis, year-over-year asking-price growth decreased slightly in July (+15.5%) from the June pace (+16.2%).
In the Denver-Aurora-Lakewood metro area, the median listing in July was $650,000, an 8.3% increase from last year. Active listings in the area were up 70.4% from the previous year.
Other key findings from the report:
The full report and methodology can be viewed here.
Despite an interest-rate hike of three-quarters of a percent by the Federal Reserve on Wednesday, and additional increases likely still to come, some housing economists aren’t expecting another big surge in mortgage rates now or in the coming months.
A recent slowdown observed in the U.S. housing market has largely stemmed from the sudden jump in mortgage rates felt in late spring and early summer, in line with the Fed’s decision to move up interest rates in an ongoing effort to combat inflation.
Existing-home sales declined for the fifth straight month in June, down 5.4% from May and 14.2% from the prior year, according to the National Association of Realtors. Unsold inventory was at three months’ supply nationally in June, up from 2.6 months in May and 2.5 months in June 2021, likely attributed to less buyer demand.
Lawrence Yun, chief economist at the NAR, said in a mid-year forecast event by the association before Wednesday’s Fed meeting that the mortgage market has already priced in additional rate hikes, including yesterday’s increase. Plus, fixed mortgage rates are tied to the 10-year Treasury rate, although other metrics, including inflation, are factored in.
“It’s possible that we may be topping out in mortgage rates, independent of what the Fed may be doing in future months,” Yun said.
After an average of 3.45% in January, the 30-year fixed mortgage rate jumped to an average of 4.98% in April, then 5.52% in June, according to Freddie Mac data. More recently, that rate has hovered in the mid-5% range.
That doesn’t mean mortgage rates will completely stabilize but smaller swings up and down are more likely, Yun and others predict.
Mark Vitner, senior economist at Wells Fargo & Co. (NYSE: WFC), said in an email there probably will not be a repeat of the abrupt move seen this past spring.
“There is a growing sense that the Fed is getting close to finishing hiking rate(s), and the markets are expecting the Fed to cut interest rates next year,” Vitner continued. “Mortgage rates have already likely seen their highs for this year but will probably spend much of the rest of the year a quarter percentage point above or below 5.5%.”
Skylar Olsen, chief economist at Seattle-based Zillow Group Inc. (NASDAQ: ZG), also said in an interview mortgage rates will likely be “steady as she goes” for the foreseeable future, even with the additional expected hikes from the Fed.
But if mortgage rates remain somewhat stable, hovering in the mid- to upper 5% range, does that mean the housing-market slowdown that’s occurred in recent weeks in response to skyrocketing mortgage rates will reverse course?Olsen said affordability because of higher mortgage rates and home prices will still be the key hurdle for a lot of households.
“If interest rates can remain stable, then changes and behavior are much more driven by long-term dynamics, which are still solid: a big millennial generation, a boomer generation downsizing,” Olsen said. “There’s a lot in the housing market that’s not going to change as much as (people might) think, but we are absolutely going into a period where the volumes and quantities are going to slow.”
Thursday morning, the U.S. Bureau of Economic Analysis reported real gross domestic product declined for the second consecutive quarter in Q2, at an annualized rate of 0.9%. The U.S. economy slowed at a rate of 1.6% in Q1, which initially raised the possibility of the economy heading into a recession.
Economists have debated what will signal if the country is in a recession, with some saying two consecutive quarters of negative GDP growth translates to the U.S. economy being in a recession. The Business Cycle Dating Committee, part of the National Bureau of Economic Research, officially decides when the national economy is in a recession, but those evaluations are typically made retroactively.
The NBER says on its website a recession involves a significant decline in economic activity that is spread across the economy and lasts more than a few months. But depth, diffusion and duration — the three key criteria named by the department in determining the state of the economy — is somewhat interchangeable, and extreme conditions revealed by one criterion may partially offset weaker indications from another.
And what’s making the current economic situation “bizarre,” as Yun put it, is a continued strong job market — an important gauge that’s at odds with a typical recessionary period.
In June, U.S. employers added 372,000 jobs, and the unemployment rate remained unchanged from a month prior, at 3.6%, according to the U.S. Department of Labor.
Federal Reserve Chair Jerome Powell said in a news conference Wednesday while there is a slowdown in growth, he pointed to what he called very strong data coming out of the labor market. He said he didn’t think the U.S. was in a recession currently.
“In all probability, demand is still strong, and the economy is still on track to grow this year, but the slowdown in the second quarter is notable and we’ll be watching that,” Powell told reporters.