Risky Mortgages Are Back. What It Means for a Housing Market Crash
Americans are increasingly seeking out riskier home loans - but a housing crash is unlikely to happen this year, experts say.
Recent data reveals a growing trend among Americans opting for riskier home loans, particularly adjustable-rate mortgages (ARMs) with lower interest rates, as they navigate the challenging and expensive housing market. According to the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey (WMAS), the share of borrowers choosing ARMs was 8 percent last week, the highest level in five weeks, as reported by MBA senior vice president and chief economist Mike Fratantoni.
These mortgages have an interest rate that remains fixed for a set period, typically up to ten years, before changing periodically based on market benchmarks or a lender-set percentage. While ARMs provide lower initial interest rates and more affordable monthly payments, they become riskier once the fixed-rate period ends and rates adjust.
Senior economist Joel Berner from Realtor.com explains that the rising demand for riskier loans indicates buyers' eagerness to purchase despite affordability constraints. Since mortgage rates have increased from slightly below 6 percent to 6.71 percent since the beginning of the Iran war in late February, ARMs become an attractive option for buyers on the margin.
The national 30-year fixed-rate mortgage averaged 6.71 percent in the week ending September 3, a slight increase from the previous week and year earlier. Meanwhile, home prices continue to rise, with the national median sale price of a typical U.S. home reaching $407,730 in July, up 3.2 percent from a year earlier. The surge in interest for ARMs coincides with weak demand for conventional mortgages, with total mortgage application volume growing only 0.8 percent last week compared to the previous week.
Berner notes that ARMs can be beneficial for buyers anticipating a short-term stay in their home, as they allow lower monthly payments during the fixed-rate period. However, the risk arises when the rate resets, potentially leading to higher payments that the borrower may not be able to afford. While the risk of a crash is still considered low, Berner cautions that the market is currently "cold" due to long-term affordability issues, and a crash remains unlikely barring unexpected events.
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