Sometimes stories come along that can only be described as jaw-dropping. As hard as it may be to believe, the adjustable-rate mortgage (ARM) has reached levels not seen since the housing bubble burst in 2008. Now you may be thinking who in their right mind would get an ARM with the low interest environment of today? And I would be as equally as nonplussed as you dear reader. But, apparently there are still lots and lots of people ready to put that bet down on their home:
In the second year of the U.S. housing recovery, the loans that helped trigger the housing bust are making a comeback. Applications in late June rose to the highest level since 2008 after the Federal Reserve sent fixed rates surging by signaling it may curtail bond buying credited with pushing borrowing costs to the cheapest on record.
Ok yes, rates did “surge” I suppose, but historically they are still at really low levels. (You can see the current levels in your area right here at the PrimeRates site!). This cannot be looked at as anything other than a danger signal. It is true that many of these mortgages are surely being taken out by would-be flippers and those that can afford the mortgage either way and just prefer the lower rates for now. But those are not the people that caused the bubble to wobble in the first place (for the most part) and they will not be the ones to signal the end of any bubble this time around. It’s those that bought “too much” house, as the lingo goes, that will be having trouble keeping up with their payments once rates really rise. But, with just that quick spike in rates, ARMs have become attractive again:
“We’ve seen a shift in the way people look at adjustable-rate mortgages,” said Cameron Findlay, chief economist of Discover Financial Service’s home-loan unit. “They’re still skeptical about using ARMs, given the role they played in the financial crisis, but the sticker shock of what fixed rates have done is making them look for alternatives.”
I think that may be nailing the issue on the head and maybe even a sign that things are not as worrying as they seem. After all of that tapering talk and the quick spike in rates a few weeks ago, many people got hit with a sudden price hike. They may have settled on a house or two that they could afford and just as they made a decision on which house to go with, their potential monthly payment soared above their budget. At that point, and with their heart now set on a certain house, many may have turned to ARMs to make it happen. And there are those that are using some magical thinking as well. Some may be justifying it by thinking that rates have just spiked, so really they won’t go that much higher–and besides we’ll just sell the house before mortgage payments rise–and anyway we’ll be making loads of money by then so it shouldn’t be a problem–and etc., etc. All of those things could happen of course but then again, maybe not.
With the possibility that this could just be an aberration due to the quick nature of the rise, it will be interesting to see if it continues. As I mentioned, it is definitely a danger signal but maybe with a little luck the housing market won’t go through another 2008 all over again. The good thing about ARMs is that the real danger of people having trouble with the higher rates won’t happen until a few years have passed and the new, higher rates kick in. Does that make you feel better!? I didn’t think so…
This article was first published on http://moneyprime.com.