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For Housing Market Legs Look to ARMS
Tony Polito / Metrostudy / August 16, 2013
News reports, homebuilder stock prices and economists in general have shown concern over the spike in interest rates from early May to today. While this should not have been a surprise based on comments from Fed Chairman Bernanke last year that all good things come to an end (Fed stimulus), the sky is falling comments from some in the media is concerning. Let’s look at the facts: the Market Composite Index is running near the 23 year average; the Refinance Index is still running above the 23 year average; however, the Purchase Composite Index is running only about 75% of average. Low interest rates benefitted those already in housing more than those looking to buy. The overall economy and job growth in particular will be the major force behind the purchase index reaching historic average. The economy can handle higher interest rates (which despite the late spring spike are still 74 basis points below the 23 year average) as long as jobs and wage growth are present.
However, there is another arrow in the quiver for the housing market – ARMS. The volume of ARMS as a percentage of total loans was just 6% this week, significantly below the 23 year average of 17.1%. Buyers of more expensive homes are using ARMS at a greater rate than those in cheaper homes, as the percent of total dollar volume was 14% on just 6% of the loan volume. Is this a future problem? In my opinion, this will not be a major problem. Why, first, the requirement for larger down payments should protect lenders in case home prices slide in the future. Second, more expensive homes usually involve more savvy homebuyers. This does not mean they are immune to market risks, but higher credit scores and financial resources do provide some comfort. A check with my mortgage lender showed that the 30 year fixed was near 4.5% today while the seven year ARM was at 3.85% and the five year ARM was at 3.375%. As Fed tapering will likely occur this fall into early winter and interest rates will rise on both fixed and adjustables, look for both the number of ARM loans and the dollar volume of ARM loans to move nearer to the 23 year average. This will keep the housing market moving forward into 2014.