Buying Power

In a lending environment marked by rising mortgage rates, adjustable-rate mortgages can help prospective home buyers recapture some of their house-buying power. That’s the premise of First American Financial Corp. analysis via its Real House Price Index, which jumped by 50.8% year over year – the fastest growth in the more than 30-year history of the series. According to analysts, the annual decline in affordability 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.

The financial climate has led to nothing short of an ARMs race among consumers, suggested First American Financial’s chief economist, Mark Fleming. “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,” he 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.”  That difference is nothing short of a game changer – particularly for first-time homebuyers, he suggested. “Because ARMs offer a lower mortgage rate, there has been a steady increase in the share of ARM loans as mortgage rates have increased,” Fleming said. “For the month of May, the average share of ARM loans was up to 9.8 percent, compared with 3.9 percent one year ago. The findings were revealed in the May 2022 First American Real House Price Index, which measures the price changes of single-family properties throughout the US adjusted for the impact of income and interest rate changes on consumer house-buying power over time at national-, state- and metropolitan-area levels.

Source: First American