Adjustable-rate mortgages are most widely used in expensive metro areas
Housing affordability in the U.S. is worsening as housing prices continue to increase at a record- pace along with rising mortgage rates.[1] Between December 2020 and March 2022 the average mortgage rate on 30-year, fixed-rate mortgages (FRM) jumped up by 149 basis points or 1.49%, whereas rates on 5/1 adjustable-rate mortgages (ARMs) increased by only 40 basis points for the same period.[2] This increase in mortgage rate on FRM is incentivizing buyers to take out ARMs.
After the housing bubble burst in 2007, the use of FRM has been more widespread than ARM. The ARM share of the dollar volume of mortgage originations moved from almost 45% of the total in mid-2005 to a low of 2% in mid-2009. Since then, the ARM share has fluctuated between about 8% and 18% of mortgage originations, depending on the prevailing rate on a FRM (Figure 1). The ARM share declined during the pandemic and reached a 10-year low of 4% of originations in January 2021. As the fixed mortgage interest rates have increased from below 3% to the current March 2022 levels, which were last seen in 2018, borrowers are once again incentivized to consider an ARM. As of March 2022, the ARM share accounted for 13% of the dollar volume of conventional single-family mortgage originations, a threefold increase since January 2021. If the mortgage rates on FRMs continue to increase in the coming years, the share of loans originated with an ARM will likely increase as well.