December 2017   Volume 43, Number 12      


Homebuyers Rush to Riskier Mortgages As Home Prices Rise

Home prices are on the rise again. As a result, many potential buyers are looking for ways to afford a monthly mortgage payment.

Use of ARMS on the Rise

The number of adjustable-rate mortgage originals increased over 40 percent from the first quarter of the year to the second, according to an analysis performed by Inside Mortgage Finance. ARMs offer lower interest rates than fixed-rate loans and today’s ARMs generally have a fixed period of about five years. That means rates can increase after five years. Still, the relatively shorter fixed rate period of ARMs compared to traditional 30-year fixed mortgages makes them riskier in the long run.

ARM demand typically increases from the first to the second quarter of the year because spring is the busiest season for home buying and it is typically when families dominate the market, looking for larger, pricier homes. Still, the increase in ARMs in the spring of 2016 was just 15 percent compared to a 40 percent jump in 2017. That suggests potential homebuyers are struggling with affordability this year and opting for a lower-rate mortgage product despite the long term consequences.

While mortgage rates remain at historic lows, they have been increasing slowly. Since the housing crisis, the overwhelming majority of homebuyers have favored the safety of the 30-year-fixed rate mortgage. However, weakening affordability is changing that.

Home prices have continued to increase for the past three years and have recently begun to increase more rapidly. Prices nationally increased 6.9 percent in August compared with August of 2016, the biggest gain in three years. The annual gain in July was 6.7 percent, according to CoreLogic.

“One thing that’s helped to fuel demand, and certainly home price growth, as much as the lean inventory of for-sale homes is that mortgage rates have really cooperated,” said Frank Nothaft, chief economist at CoreLogic.

Home Prices May Peak Soon

Home prices are also rising faster than inflation. However, Nothaft predicts that if, as he expects, mortgage rates continue to increase, gains in home prices will ease in 2018. That will be the tipping point, he said, although some argue the tight supply on home inventory, especially at the low end of the market, will keep prices lofty despite higher mortgage rates.

Already, roughly 50 percent of the nation’s top 50 housing markets are overvalued in relation to income and employment growth.

“Prices are being driven up by very tight market conditions,” noted Matthew Pointon, property economist at Capital Economics. “On a per capita basis, the number of existing homes for sale is at a record low, and buyers are therefore having to up their offers to secure a home.”

Pointon said we should actually expect home prices to rise by more than 10 percent, given the tight supply, but tight mortgage lending standards are putting a damper on that growth.

ARMS Loans Safer These Days

While ARM loans are generally blamed for the housing crash that occurred in the 2000s, the current ARMs are nothing like those of the past. The ARM products popular at that time, such as negative amortization loans, which offered very low rates on the front-end but then tacked the initial savings on to the loan itself, no longer exists.

Today, loans must also be fully documented and underwritten to the full length of the loan to ensure borrowers have the ability to pay even if the rate of the loan increases. Lenders are also required to make it clear to borrowers that the rate is fixed only for a certain term and that it will increase after that term, given the current trajectory of rates overall.

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In this issue:

Homebuyers Rush to Riskier Mortgages As Home Prices Rise

Amazon Ventures Into Real Estate With Hire a Realtor Service

Digital Real Estate Platform Home61 Raises $4 Million

Homebuyers Can Now Crowdfund Their Mortgage Down Payments

Millennials Going Over Budget to Buy Homes

National Flood Insurance Program Might Not Be Able to Fulfill Obligations to Homeowners

San Francisco Most Over-valued Market in U.S.

Trump Tax Reform Sparks Fears for California Realtors

Weekly Mortgage Applications Stall Along With Rates and Home Sales

10 Reasons to Schedule a Seller Counseling Session


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