The recent decline in adjustable-rate mortgage ("ARM") demand marks the end of an era in which new mortgage products made it easier for borrowers to afford ever-more expensive homes.
The declining popularity of ARMs comes as short-term interest rates have risen and some lenders have raised prices on these loans for new borrowers. As a result, fixed-rate mortgages are regaining popularity and some borrowers are becoming disenchanted with their option ARMs (where teaser rates of as low as 1% gave borrowers multiple payment choices but can lead to a rising loan balance). Some borrowers are moving to hybrid ARMs where the rates on loans remain fixed for as many as 10 years before adjusting annually.
The housing market continues to signal that the boom of the past five years is bursting as sales of previously owned homes fell by 2.7 percent in October. "This signals that the housing sector has likely passed its peak. The boom is winding down to an expansion," said David Lereah, chief economist for the National Association of Realtors. Click here for more on the housing market bubble.
Source: The Wall Street Journal, November 29, 2005