Is this a cause for concern - ARM Junkies

L

lrm21

The following information comes from John Burns Real Estate Consulting. No association except as a subscriber to a free newsletter.

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Adjustable rate mortgages have regained popularity of late, despite interest rates that are near 40-year lows. Last month ARMs constituted 30.4% of home loans, the highest level since early 2000 and a level that is approaching the all-time high of 35%. ARMs include loans that are fixed for a number of years and then change to adjustable.


http://www.realestateconsulting.com/images/PctARM.gif

ARMs are on the rise for all of the following reasons:

Affordability - Many first time buyers need adjustable rate loans to qualify for a home. These buyers are exposed if rates rise significantly, but they are not the only reason that ARMs are rising.

Retirement Planning - Many homeowners, particularly Baby Boomers, are opting to refinance their home with an adjustable rate mortgage with the intent of maintaining the same mortgage payment and amortizing the loan more quickly. Since the youngest Boomer turns 40 this year, they realize that they should pay off their mortgage in less than 30 years.
Confidence - Buyers of all ages are becoming more confident that rates will not rise significantly in the future. With a 2.13% spread between fixed and adjustable mortgage payments, buyers are willing to take the risk to save on interest payments.

John Burns Real Estate Consulting, Inc. © 2003. All rights reserved
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This reeks of people loading just before the party tanks. I can't imagine what these people will do when rates shoot up.
 
Quote from lrm21:

The following information comes from John Burns Real Estate Consulting. No association except as a subscriber to a free newsletter.

------------------------------------------------------
Adjustable rate mortgages have regained popularity of late, despite interest rates that are near 40-year lows. Last month ARMs constituted 30.4% of home loans, the highest level since early 2000 and a level that is approaching the all-time high of 35%. ARMs include loans that are fixed for a number of years and then change to adjustable.


http://www.realestateconsulting.com/images/PctARM.gif

ARMs are on the rise for all of the following reasons:

Affordability - Many first time buyers need adjustable rate loans to qualify for a home. These buyers are exposed if rates rise significantly, but they are not the only reason that ARMs are rising.

Retirement Planning - Many homeowners, particularly Baby Boomers, are opting to refinance their home with an adjustable rate mortgage with the intent of maintaining the same mortgage payment and amortizing the loan more quickly. Since the youngest Boomer turns 40 this year, they realize that they should pay off their mortgage in less than 30 years.
Confidence - Buyers of all ages are becoming more confident that rates will not rise significantly in the future. With a 2.13% spread between fixed and adjustable mortgage payments, buyers are willing to take the risk to save on interest payments.

John Burns Real Estate Consulting, Inc. © 2003. All rights reserved
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This reeks of people loading just before the party tanks. I can't imagine what these people will do when rates shoot up.
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When rates "shoot up" they will be forced to save (to cover debt expense) instead of spending. Won't bode well for consumer demand.
 
I think there is SOME cause for concern but not as much as is implied. Reason being that many of these ARMS are not adjustable out of the blocks, most are 5/1, 7/1 or 10/1 programs. The average person owns a home for only about 7 years from what I've read, so the argument there is that you are paying a higher rate than is necessary by locking a rate for 30 years that you will only use for about 7. Of course each person has to make that call based on their expectations.

The other caveat to this story is that many of the XX/1 programs are newer. To say that we are at some sort of all time high for ARMS is a fairly easy statement to make.
 
My feeling is if interest rates shoot up many will not be able to keep their homes when the adjustment period comes.

It does seem like a scary scenario because if and when rates go up prices generally go down.

Someone forced to sell because they can no longer make the payments,and Real Estate prices dropping sounds like fuel for a bear RE mkt.

But hey, interest rates many not move and the party could continue.
 
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