As would-be homebuyers look for ways to combat eroding affordability, adjustable-rate mortgages (ARMs) are finding themselves in vogue in a big way, according to CoreLogic.
In the first five months of 2022, the total number of home purchases financed with ARMs jumped by an astounding 75% year over year. Only 3.5% of home purchases funded via mortgage — about 13,400 transactions — utilized an ARM in May 2021, according to CoreLogic. By May 2022, however, this share had ballooned to 8.5%, or nearly 28,000 purchase deals.
“Sizing the origination of ARMs in terms of loan value – which provides a more relevant metric for investors – paints a similar picture of rapid growth and gaining market share,” said Yanling Mayer, principal economist at CoreLogic.
At the start of 2022, ARM-backed investment value stood at $5.31 billion, or 6.4% of all purchase mortgage-backed investments. In May, however, this total reached $17.16 billion, more than doubling its previous market share to 14.1%. From January through May of this year, purchase-ARM financing grew by 69.1% year over year and provided $56 billion in investment value.
The aggregate loan value equates to 10.5% of all purchase mortgages during the first five months of the year. Over the past decade, the purchase market share of ARMs has never surpassed 10% for a full year, even with adjustable-rate products evolving from high-risk, high-default loans during the subprime mortgage crisis to more sound offerings today.
Lately, however, the trajectory of loan growth for the ARM market has coincided greatly with rapidly rising mortgage rates. Homebuyers have flocked to the product, trading fixed rates for a more affordable means to purchase in the interim. Interest rates for 5/1 ARMs have risen more slowly than those for 20-year fixed-rate mortgages in the past year. In April, for example, the interest rate for an ARM averaged about 3.7% while 30-year fixed loans averaged 4.98%. That’s a difference of 128 basis points, making ARM rates as much as 25.7% less expensive, CoreLogic noted.
With the rate spread between adjustable- and fixed-rate loans trending in favor of ARMs, and with mortgage rates staying elevated, CoreLogic anticipates continually high ARM volumes moving forward.
“Following the Federal Reserve Board’s recent move to raise the benchmark interest rate, and with the market expecting another rate hike in September, the interest rates in the coming months will likely continue to sustain ARM’s appeal to investors seeking higher investment yield and homebuyers shopping for more affordable home financing,” Mayer said.