Location and loan size influence demand for adjustable-rate mortgages
The concurrent surge in mortgage rates and U.S. housing prices has led to a decline in affordability.
As fixed-rate mortgages (FRMs) increase, some homebuyers are exploring alternatives like adjustable-rate mortgages (ARMs) and buydown points to reduce their monthly payments, particularly in the initial period of the loan. Each percentage point rise in mortgage rate means additional costs for homebuyers and results in higher monthly payments.
FRMs have become more widespread compared with ARMs since the housing bubble burst in 2007. The share of ARM dollar volume in mortgage originations declined from nearly 45% in mid-2005 to a low of 2% in mid-2009.
Since then, the ARM share has fluctuated between approximately 4% and 25% of monthly mortgage originations, depending on the prevailing FRM rate (Figure 1).
Discover Insights Into the Housing Economy
The ARM share declined during the pandemic and hit a 10-year low of 4% of mortgage originations in January 2021. However, as FRM interest rates increased from below 3% to record levels during the last two years, ARMs have gained renewed traction.
The ARM share rose to 15.5% of the dollar volume of conventional single-family mortgage originations in May 2024, the highest of this year, as interest rates rose. The average 30-year, FRM interest rate increased to 7.06% in May from 6.99% in April. During the same period, the 5/1 rate remained unchanged. However, the spread between the FRM interest rate and the ARM interest rate narrowed during the pandemic, and is now at the pre-pandemic level.
The ARM share varies significantly based on location and loan amount. ARMs are more common in expensive areas and among homebuyers borrowing large loans than for those with smaller loans. As ARMs have a lower initial interest rate than FRMs, buyers see bigger monthly savings in the initial payment, especially for bigger loans.
Find Out More About the Mortgage Market
Figure 2 plots the average sales price against the ARM share for metro areas in 2023[1]. There is a strong relationship between the average sale price and the ARM share. The ARM share is higher for metros with a higher average sales price. For example, the San Jose, California metro area had both the highest average sale price and the largest share of ARMs out of all conventional mortgage originations in 2023.
In May 2024, among mortgage originations exceeding $1 million, ARMs comprised 40% of the dollar volume, unchanged from May 2023 (Figure 3). For mortgages in the $400,001 to $1 million range, the ARM share was approximately 13%, down by 2 percentage points from May 2023. For mortgages in the $200,001 to $400,000 range, the ARM share was only 7% in May 2023, down by 4 percentage points from the previous year. Despite these year-over-year declines, the ARM share increased compared with the prior month.
Although the ARM share is rising with increasing mortgage rates, it remains below and different than pre-Great Recession levels. The most common ARMs today are of the 5/1 and 7/1 type, which minimizes the risk[2]. Moreover, despite the current rise in originations, the number and share of outstanding ARMs remains very low. As of April 2024, ARMs accounted for approximately 5% of conventional originations by dollar amount and 3% by count.
CoreLogic’s Office of the Chief Economist regularly explores current mortgage trends on the last Thursday of each month in a new series of analyses. And our Office of the Chief Economist home page always has the latest insights from out team of experts.
[1] Metro areas used in this analysis are Core Based Statistical Areas.
[2] Since 2010, the riskiest ARM products, such as option ARM and interest-only ARM, have largely vanished. The Ability-to-Repay and Qualified Mortgage (QM) standards have generally eliminated such risky products. The QM regulation requires ARMs be underwritten to the maximum interest rate that could be applied during the first five years of the loan, eliminated negative amortization, and setting standards for computing the DTI ratio.
©2024 CoreLogic, Inc. All rights reserved. The CoreLogic content and information in this blog post may not be reproduced or used in any form without express written permission. While all of the content and information in this blog post is believed to be accurate, the content and information is provided “as is” with no guarantee, representation, or warranty, express or implied, of any kind including but not limited to as to the merchantability, non-infringement of intellectual property rights, completeness, accuracy, applicability, or fitness, in connection with the content or information or the products referenced and assumes no responsibility or liability whatsoever for the content or information or the products referenced or any reliance thereon. CoreLogic® and the CoreLogic logo are the trademarks of CoreLogic, Inc. or its affiliates or subsidiaries. Other trade names or trademarks referenced are the property of their respective owners.
