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June 13, 2006
Only One Household In Seventeen (??) Will See Their Mortgage Rates Reset In 2006
Let me preface this blog item by saying it has gone through several permutations. First the headline said one in 20. Then it said one in 24. Now it says one in 17 (??). Why the (??)? Because the numbers are just a little fuzzy. A press release from Harvard today put the share at one in 10. But when I spoke to the researchers, they said the number in the press release was probably too high and the number is probably in the range of 6%, which would be about one in 17. Sorry for the mess.
Here's my latest cut:
According to the authors of a new Harvard University study, somewhere in the range of 6% of U.S. homeowners have mortgages whose rates will reset upward in 2006.
That's comforting to people worried about the impact of higher interest rates on the housing market. Here's the math: Only about two-thirds of homeowners carry a mortgage at all. Of those, only about one-quarter have adjustable-rate mortgages. And of those with adjustable-rate mortgages, only about one-quarter are scheduled to reset their rates in 2006. That's one-quarter of one-quarter of two-thirds, which Excel tells me is 4%. On top of that you have to add people with low teaser rates that will expire this year. That brings the share of homeowners with resetting mortgages to somewhere between 5% and 10%, with 6% being the most likely number, Rachel Bogardus Drew, one of the authors, said in an interview today.
What's more, the Harvard study says, the vast majority of people have enough equity in their homes that they won't be underwater on their mortgages even if housing prices do fall somewhat. As of 2004, the most recent year for which numbers are available, only 3% of households have less than 5% equity in their homes, and fully 87% of households have at least 20% equity.
The annual Harvard study, The State of the Nation's Housing 2006, also has a bunch of more worrisome statistics about affordability, etc. It's an excellent resource that I recommend to anyone in the business.
(Dear Readers: I accidentally broke the media embargo by posting this item last week before its official release date. When Harvard complained I took it down. Today is the official release date, so the item is back up.)
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I'd like to see more data on how concentrated they are in certain markets, such as Southern California, Phoenix, Vegas, D.C., and parts of Florida. I think that looking at the U.S. as a whole isn't that useful. I'm certain that a lot of the more over-inflated markets have a much higher share of ARM's, and when they start resetting en masse that we'll see some real problems in those markets. How they will affect the U.S. real estate market as a whole is another question.
Posted by: mike at June 13, 2006 03:40 PM
Two comments here. One: I am one of those home owners with more than 20% equity in my home. Do you know how I earned that equity? I put 5% down two years ago and rode on 25% appreciation. Within a year I got reappraised and consolidated both loans into one. Viola! 20% equity! If I can obtain 20% equity here in Northern California by doing nothing and having only been in the housing market for two years, how much confidence do you have in the rest of those folks and their hard earned equity? If it can appear in two years, it can evaporate in two years...
2nd point: be sure to check out the advisory board behind the Harvard study: http://www.jchs.harvard.edu/people/pabmemberlist.html
any chance for bias here?
Posted by: Jason at June 13, 2006 04:09 PM
Most of these exotic loans came post 2003 when buyers really began to fear being priced out of the market. I would have to say that the (conservative) 6% resetting this year will be nothing compared to the number of loans poised to reset in 2007. Not to mention the fact that a 25 bps hike from the FED seems eminent at the end of the month. Home owners who didn't take good care of that precious equity will most likely find themselves upside down very soon.
Posted by: adam at June 14, 2006 06:25 PM
I work in real estate in Southern Cal, it is very interesting how the market is now. As I do my daily farming, in different areas of the city, I see some areas that have every block an average of three signs for sale. As I drive to some other neighborhoods I see one or none. In addition, from the listings I have I used to get calls until around March of this year. Now, in most areas it is as if most of the buyers are in vacation!... I know it is summer... but it is no excuse... My sellers still expect me to sell their home at the originally listed price, yet after some of the buyers have gone to get prequal by their lender they are very upset with the 6.5+ rate they are getting and the high mortgage payments they would have to pay at the originally listed price... A lot of people ask as if resentful, where are the good paying jobs for those people that are still buying???
Posted by: Miguel at June 26, 2006 01:41 AM
I'd be interested to know the stats based on regions. I'm sure a lot more people will have ARMs resetting in California than in TX.
Posted by: john at July 25, 2006 01:30 PM
There is so much disinformation being put out by people who themselves have a vested interest in driving down housing prices. Some examples of these people are evidenced by some of the postings on this blog. Take a look at what one foreclosure information official recently said about the distortions of the information on housing. "New U.S. foreclosures dropped to their lowest level of the year in June, despite some of the sensational and misleading figures that we've seen reported recently," said James J. Saccacio, chief executive officer of RealtyTrac. "We think it's irresponsible to present falsely-inflated numbers to the media for commercial gain as we've seen happen recently. The fact is that most states, with the notable exception of California, Ohio and Nevada, reported decreased numbers of foreclosure filings in June."
Posted by: Frank at July 28, 2006 11:50 AM