MReport August 2022

TheMReport — News and strategies for the evolving mortgage marketplace.

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44 | M R EP O RT O R I G I NAT I O N S E R V I C I N G DATA G O V E R N M E N T S E C O N DA R Y M A R K E T THE LATEST ORIGINATION More Homebuyers Taking up ARMs Mark Fleming, Chief Economist at First American, explains why current conditions mean adjustable-rate mortgages "could be a game-changer for many first-time homebuyers." F irst American Financial Corporation, a provider of title, settlement and risk solutions for real estate transactions, has released the May 2022 First American Real House Price Index (RHPI). The RHPI measures the price changes of single-family proper- ties throughout the United States adjusted for the impact of income and interest rate changes on con- sumer house-buying power over time at national, state and met- ropolitan area levels. Because the RHPI adjusts for house-buying power, it also serves as a measure of housing affordability. All in all, First American found that on a national level, house buying power decreased to $374,814 from $384,648 in April. Average household income increased by 4.6% to $71,340 from $71,190 while mortgage rates in- creased to 5.2% from 5% in April. Real house prices increased 3.8% from April 2022 and 50.8% from last year. The five states with the great- est year-over-year increase in the RHPI are: Florida (+72.1%); South Carolina (+63.3%); Arizona (+59.1%); Georgia (+57.8%); and North Carolina (+56.6%). There were no states with a year-over-year decrease in the RHPI. "In May 2022, the Real House Price Index (RHPI) jumped up by 50.8% year over year, which is the fastest growth in the more than 30-year history of the series. This rapid annual decline in affordabil- ity was driven by a 20.1% annual increase in nominal house prices and a 2.3 percentage point increase in the 30-year, fixed-mortgage rate compared with one year ago," said Mark Fleming, Chief Economist at First American. "For homebuyers, one way to mitigate the loss of affordability caused by a higher mortgage rate is with an equivalent, if not greater, increase in household income. Even though household income increased 4.6% since May 2021 and boosted consumer house-buying power, it was not enough to offset the affordability loss from higher mortgage rates and fast-rising nominal prices." "As affordability wanes, poten- tial home buyers are looking to adjustable-rate mortgages (ARMs) for the lower rate benefit," Fleming said. "Given the lower mortgage rate that is typically offered on an ARM today, com- pared with the 30-year, fixed-rate mortgage, ARMs offer prospective first-time home buyers an option to recapture some house-buying power in a rising rate environ- ment." "Since the beginning of 2022, the 30-year, fixed mortgage rate has increased 1.8 percentage points. While the rates on ARMs have increased too, ARMs have lower rates than 30-year, fixed-rate mort- gages," Fleming said. "According to the Mortgage Bankers Association's weekly survey, the average rate on the 30-year, fixed-rate mortgage was 5.45% in May, while the aver- age rate on a five-year ARM was 4.46%." "Consumer house-buying power, how much one can buy based on average household income and a given mortgage rate, increases when the mortgage rate drops," Fleming said. "In fact, at those rates, an ARM increases consumer house-buying power by nearly $44,000 when compared with a traditional 30-year, fixed- rate mortgage. This could be a game-changer for many first-time home buyers." "Because ARMs offer a lower mortgage rate, there has been a steady increase in the share of ARM loans as mortgage rates have increased. For the month of May, the average share of ARM loans was up to 9.8%, compared with 3.9% one year ago," Fleming said. "As all mortgage rates continue to increase, the share of ARM financing will likely increase." Knowing all of this, are ARMs the answer? "While ARMs were a symbol of the housing market crash, today's ARMs are very differ- ent. They offer reduced risk of significant payment shock when the fixed-rate period ends and rates become adjustable," Fleming concluded. "As long as the 'spread' between ARMs and fixed-rate mortgages continues, more first-time home buyers may choose ARMs because the lower mortgage rate gives them a purchasing power 'boost' over the 30-year, fixed-mortgage rate."

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