Share of ARM Loans Climbs to 14-Year High Mark

Higher rates are forcing more potential buyers and those seeking refis to the sidelines, as the Mortgage Bankers Association (MBA) reported that overall mortgage application volume fell yet again, dropping 4.5% week-over-week for the week ending October 14, 2022.

The MBA reports that the Refinance Index decreased 7% from the previous week, and was 86% lower than the same week just one year ago. The seasonally adjusted Purchase Index decreased 4% from one week earlier, while the unadjusted Purchase Index decreased 3% compared to the previous week, and was 38% lower than the same week one year ago.

“Mortgage applications are now into their fourth month of declines, dropping to the lowest level since 1997, as the 30-year fixed mortgage rate hit 6.94%–the highest level since 2002,” said Joel Kan, MBA’s VP and Deputy Chief Economist. “The speed and level to which rates have climbed this year have greatly reduced refinance activity and exacerbated existing affordability challenges in the purchase market. Residential housing activity ranging from housing starts to home sales have been on downward trends coinciding with the rise in rates. The current 30-year fixed rate is now well over three percentage points higher than a year ago, and both purchase and refinance applications were down 38% and 86% over the year, respectively.”

A recent blog post by Mark Fleming, First American’s Chief Economist and leader of the Data Sciences team, explored what buyers and investors should expect through year-end in terms of Housing Market Potential.

“Market dynamics and the broader economic outlook have changed dramatically in the last 12 months, and that has strongly influenced the fundamentals that drive buyer and seller behavior and the potential for existing-home sales compared with a year ago,” Fleming said. "The higher the mortgage rate, the more sellers will go on strike and the more potential buyers will feel the impact of reduced house-buying power, but price appreciation will further slow and potential buyers can use adjustable-rate mortgages to regain some of that lost house-buying power."

Redfin Deputy Chief Economist Taylor Marr added, “Prospective homebuyers and sellers barely had time to get used to 5.5% mortgage rates over the summer before they rose to nearly 7% this month. The second sharp rate increase this year, together with nerves about inflation and the direction of the economy, is dragging home-sale activity down further than it was over the summer and pushing homebuyer sentiment down near its all-time low. The combination is also unnerving for homeowners who don’t want to list their home when demand is weak or give up their own low mortgage rate.”

The rise in rates may have put many in retreat mode; however, with additional hikes anticipated, many locked in adjustable-rate mortgages (ARMs) as rates closed in on 7%. The MBA reported the refinance share of mortgage activity decreased slightly to 28.3% of total applications from 29.0% the previous week, while the ARM share of activity increased to 12.8% of total applications.

“With rates at these high levels, the ARM share rose to 12.8% of all applications, which was the highest share since March 2008,” said Kan. “ARM loans continue to remain a viable option for borrowers who are still trying to find ways to reduce their monthly payments.”

By loan type, the FHA share of total applications increased slightly to 13.6% from 13.5% the week prior, while the VA share of total applications decreased to 10.7%, down from 10.9% the week prior. The USDA share of total applications remained unchanged at 0.5% from the week prior.