There was a time when adjustable-rate mortgages (ARMs) were hot in America.
“[R]esearch within the Federal Reserve suggests that many homeowners might have saved tens of thousands of dollars had they held adjustable-rate mortgages rather than fixed-rate mortgages during the past decade,” Alan Greenspan said in 2004 when he was chairman of the Federal Reserve. Demand for ARMs exploded around the time of those comments.
Adjustable-rate mortgages, also known as floating-rate mortgages, see their interest rates reset as some benchmark interest rate moves. When rates are falling, the borrower wins as their mortgage rate falls.
Ironically, the Greenspan-led Fed hiked rates for two years not long after Greenspan touted ARMs, and homeowners went into delinquency and default as the cost of their ARMs just became too onerous.
Fast-forward to today, almost no homeowner is financing their home with an ARM. Check out the chart from HSBC.
Economists at the NY Fed’s Liberty Street Economics looked into this. In short, they concluded that it was a combination of both falling demand and falling supply.
The bottom line is this: rates are very low right now, and homebuyers appear to be taking advantage of it by locking them in with fixed-rate mortgages. Critically, these homeowners — all things being equal — are much better prepared for rate hikes should they come.
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