In May 2022, the First American Real House Price Index (RHPI) rose by 50.8 percent year-over-year, the fastest growth in the history of the series.
“This rapid annual decline in affordability was driven by a 20.1 percent 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,” First American Chief Economist Mark Fleming said in a release.
“As affordability wanes, potential homebuyers are looking to adjustable-rate mortgages (ARMs) for the lower rate benefit,” he said. “Given the lower mortgage rate that is typically offered on an ARM today, compared 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 environment.”
The 30-year, fixed mortgage rate has risen 1.8 percentage points since the start of 2022. While rates on ARMs have also increased, they remain lower.
“According to the Mortgage Bankers Association’s weekly survey, the average rate on the 30-year, fixed-rate mortgage was 5.45 percent in May, while the average rate on a five-year ARM was 4.46 percent,” Fleming said. “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 homebuyers.”
In May, the average share of ARM loans was 9.8 percent, up from 3.9 percent a year ago. “As all mortgage rates continue to increase, the share of ARM financing will likely increase,” Fleming added.
He noted that today’s ARMs are not the same as those that were popular during the housing market crash.
“They offer reduced risk of significant payment shock when the fixed-rate period ends and rates become adjustable,” Fleming said. “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.”