Did you know that 10-year interest rates peaked in 1981 at 15.8% and have been in a bull market with lower highs and lower lows every year? Interest rates have fallen for 41 years. The recent inflation numbers, the highest in over 40 years, are causing interest rates to rise. You could draw a line connecting all the highs, and that line has held for all those years (See Chart). Already the ten year is about 3%, up from .05%. It appears that the 40-year downtrend in rates is over. That would mean that interest rates are only going to go up. No one knows what that means for the future.
Now I read in Realty Biz News, “Demand for mortgages is on the rise due to what analysts say is an increase in listings on the market and fear that interest rates will continue climbing higher. However, buyers are turning to adjustable-rate mortgages or ARMs instead of standard fixed-rate mortgages.”
ARMs have an advantage in offering lower initial rates for several years.
The higher interest rates are the main factor pushing consumers towards ARMs instead. For example, the rate on a five-year ARM was 4.47% last week.
In a release, Joel Kan, an MBA economist, said, “More borrowers continue to utilize ARMs to combat higher rates. As a result, the share of ARMs increased to 11% of overall loans and 19% by dollar volume.”
At the beginning of the year, when rates were still close to record lows, ARMs accounted for just 3% of all purchase applications. At 11%, it is at its highest share since March 2008.
With ARMs, homebuyers can obtain lower rates for a fixed term of five, seven, or ten years, after which the rate will change depending on market conditions. That’s different from the days preceding the Great Recession, when poorly underwritten interest-only ARMs with shorter teaser periods helped create the housing crash in the late 2000s.
Interestingly, while new homebuyers show greater interest, existing homeowners are less inclined to refinance. Refinance applications fell 2% week on week and are down 72% from a year ago. Analysts say that’s because very few buyers can benefit from refinancing at today’s higher interest rates.
Let’s not repeat the mistakes of the past. The FED tells us that rates are going higher, maybe a lot higher. ARMs may seem like a wonderful way to buy a new house, but many lost their houses in the last housing recession because rates on ARMs rose, and homeowners could not afford their homes anymore.
“The United States housing bubble was a real estate bubble affecting over half of the U.S. states. It was the impetus for the subprime mortgage crisis. Housing prices peaked in early 2006, started to decline in 2006 and 2007, and reached new lows in 2012. On December 30, 2008, the Case–Shiller home price index reported the largest price drop in its history. The credit crisis resulting from the bursting of the housing bubble is an important cause of the Great Recession in the United States.”
“Increased foreclosure rates in 2006–2007 among U.S. homeowners led to a crisis in August 2008 for the subprime, Alt-A, collateralized debt obligation (CDO), mortgage, credit, hedge fund, and foreign bank markets. In October 2007, the U.S. Secretary of the Treasury called the bursting housing bubble “the most significant risk to our economy.”
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