The end of ultra-easy mortgage money
Two weeks ago the interest rate on one-year adjustable rate mortgages broke the ceiling of the fluctuation band it had been in for the last two-and-a-half years. In September 2002 the one-year ARM rate fell below 4.3%, eventually falling as low as 3.36% in March 2004. It began rising sharply after that and occasionally bounced against that 4.3% ceiling as in November 2004 and steadily since March 2005, even peeking through it once in late March before settling into the band again.
This little historical review is context for the dramatic rise in rates on one-year ARMs this summer. The week of July 7 they peeked through the ceiling again, averaging 4.33% nationally. Yet unlike in March, rates didn't fall back again but only kept rising. The week of July 14 rates were 4.39%, and yesterday Freddie Mac reported that last week one-year ARM rates averaged 4.42%. This is 18 basis points higher than just three weeks ago and the highest they have been since August 2002.
The use of ARMs to buy newly-built homes has come off its 2004 boil. Last summer and fall, nearly half of all buyers of newly-built homes were using ARMs; in April and May that figure was down to a third. Thus news that June housing starts were flat should be more common in the months to come.
These interest rate hikes should hit ARM-dependent markets in particular -- and that means California. Sales in the Bay Area are dramatically lower today than this time last year even though prices are still soaring, and the average monthly mortgage payment for a home-buyer is up 8.2% y-o-y. I think we can be certain average monthly income hasn't risen as much. In Southern California, the number of sales is still rising (although San Diego is an outlier, with annual sales -8.8%) and the average monthly mortgage payment up 4.8%.
San Diego and the Bay Area seem the most vulnerable as we start closing out the era of ultra-easy mortgage money.