Home buyers favoring ARMs over fixed-rate
By Deborah Adamson
Advertiser Staff Writer
|Ocean Pointe is bringing new homes to 'Ewa. Rising mortgage rates haven't yet deterred home buyers, who are more constrained by inventory.
Deborah Booker The Advertiser
"We're seeing a bit of a falloff in new refinancing activity," said John Gray, executive vice president and division manager of mortgage banking at Bank of Hawai'i, the state's largest lender. "Purchase activity (of homes) still seems very busy. We're seeing a bit of a shift from fixed rate to five-year adjustable-rate mortgages (ARMs). Those who felt they missed the boat on low 30-year fixed rates still got rates that were below 5 percent if they chose five-year ARMs."
Over the past 60 days, all types of ARMs made up between 15 percent and 20 percent of Bankoh's mortgage loans and the most popular was the five-year one, he said. That's up from last year's 10 percent level. More than a year ago, ARM activity fell below 5 percent, Gray said.
"There could be a difference of 1 percent or more between a five-year ARM and a 30-year fixed," he said.
Yesterday, Bankoh posted rates that start at an annual percentage rate of 6.19 percent for a 30-year fixed mortgage vs. 4.274 percent for a five-year ARM. The rates require a 20 percent down payment and includes a 30-day lock on rates.
In Hawai'i last week, the average 30-year fixed-rate mortgage had an APR of 6.1 percent, according to the Honolulu Board of Realtors. The 15-year fixed and one-year ARM rates were 5.51 percent and 4.41 percent, respectively. The group does not track five-year ARMs.
ARMs keep rates locked for a limited time, such as one, three, five, seven or 10 years. Afterward, the rates adjust to the market but typically are capped at a maximum rate. The annual percentage rate reflects the interest rate plus the loan costs and fees.
After hitting 40-year lows in June, mortgage rates have risen in the state and nationally. Hawai'i's 30-year and 15-year fixed pulled back a bit last week but remain near their highest levels in a year. The one-year ARM statewide average stands at a four-month high.
While rates have risen, Bankoh expects them to stay around current levels for the next year or so, Gray said. However, the longer-term outlook by Bank of Hawai'i would be for mortgage rates to increase.
Vern Omori, senior vice president of the residential real-estate division at First Hawaiian Bank, said higher rates have affected refinancing activity. Interest rates have a greater effect on someone choosing to finance than a home buyer.
While the number of refinances has dropped, refinancing activity has been more active in the past two years than the late 1990s, when rates similarly declined. Back then, Omori said, unemployment was worse and home prices hadn't rebounded yet crimping the choice to refinance.
But as the state economy improved and interest rates fell further, refinancing and home sales have taken off.
"We haven't seen a slowdown yet" in home sales, said Douglas Fortner, principal broker at Century 21 Liberty Homes in Mililani. "Anything that's priced right and can be shown is selling. ... It's one of the hottest markets I've seen."
Jim Mazzola, broker in charge at CB Pacific Properties in Kailua, agreed that housing demand remains high. In the past nine to 12 months on the Windward side, about half of homes his office represented were sold at the asking price or higher.
Buyers are more constrained by inventory homes available for sale than interest rates, real-estate agents said.
However, the residential real-estate market might be hitting a peak.
"Now, we're seeing the top-end (homes) go. I think we are topping," Fortner said. "But I don't think we're going to go into a bad market, but into a realistic market."
That means it could take two months to sell your home instead of two weeks, he said.
At the height of the housing market, Fortner has seen a home seller get four offers in one or two days. A bidding war ensues and the winning bid could be $35,000 to $40,000 more than the original asking price. In contrast, during the 1990s slump, some homes took six months to a year to sell even when priced below market, he said. A return to normal would be the middle of both extremes.
Omori sees the housing market moderating, but not crashing. Unlike the early 1990s when the Japanese were buying real estate as an investment or for second homes, drivers of the current housing boom are residents who are moving up to better houses.
"People live in it," he said. "So it's not a speculative market."
Reach Deborah Adamson at firstname.lastname@example.org or 525-8088.
Home sales surged in July to a record, but economists increasingly are concerned that housing's decade-long bull market may be cresting.
Existing homes sold at an annualized rate of 6.12 million last month, eclipsing the previous record of 5.94 million in December and January, the National Association of Realtors reported yesterday. Median price the sales midpoint skyrocketed to $182,100, up 12.1 percent from a year earlier and the largest jump since 1980.
But higher interest rates, an uncertain labor market, easy mortgage credit and the long period of hyperactivity have many alarmed about where the market may head.
Part of the glitzy July numbers may be explained by "fence jumpers" procrastinating shoppers pushed to action by a sharp increase in interest rates since June, says NAR chief economist David Lereah. The better explanation, he says, is a fundamentally sound market fueled by a lean inventory of homes for sale and strong demand from a growing number of households.
Others are less certain. "Numbers for July represent kind of a last hurrah," says Ken Goldstein, economist at the New York-based Conference Board. He foresees a cooling market but says, "Unless someone can demonstrate (that) investing in one's home is suddenly unattractive, housing is not going down for the count."
The analysis is bleaker at money manager Bridgewater Associates. The firm last week told clients to expect a 10 percent decline in home sales and prices. Higher interest rates and surging prices are putting homes out of the reach of some buyers, the company says. According to Bridgewater, rising interest rates are undermining housing. But damage won't be apparent in backward-looking monthly housing statistics for a few months.
The NAR report is the latest in a series of indicators suggesting remarkable strength in the housing market.
Last week, the government said the annualized rate of housing starts in July rose to 1.87 million units, the strongest number in 17 years.
Earlier this month, NAR reported that all 126 local markets it tracks showed year-over-year increases during the April-June quarter. It's the first time that's happened since surveying began in 1982. In addition, nearly one-third of the metro areas experienced double-digit price growth, NAR said.
But those readings measure the market as it existed when mortgage rates were at or near 40-year lows.
Forward-looking indicators show cause for concern. Applications for mortgages to purchase homes have fallen 15 percent during the past two weeks, says the Mortgage Bankers Association of America. And building permits for new homes dipped slightly last month, the Census Bureau reported.
In addition, some of the markets where housing sizzled most are cooling.
Here's what's worrying analysts:
Interest rates. Since June, the average rate on a 30-year fixed-rate mortgage has jumped 1.07 percentage points to 6.28 percent, says mortgage investor Freddie Mac. Still low by historical standards, the latest interest rate spike is the sharpest over a nine-week period since spring 1994.
The interest rate increase knocks some potential buyers out of the market and reins in the bidding of others. As a result, housing industry economists are lowering their expectations for the rate of price growth later this year.
Economists say a housing market slowdown, if any, will depend on whether rates stall or continue higher. Economic consultant John Tuccillo of Arlington, Va., looks for another full-point rise. As a result, he says, "Housing will slow dramatically and stop dead in some markets."
Christopher Cagan, research director at First American Real Estate in Anaheim, Calif., sees only a slight effect from rising interest rates.
"Interest rates are still at historic lows just 25-year lows instead of 45-year lows," says Cagan.
Forward buying. Thirty million homes have sold in the past five years, vs. 20 million in the five years ended in 1994. Total home sales have set records in nine of the past 11 years.
Conditions have been so conducive to home buying, says University of North Texas finance professor Randy Guttery, that buyers who prefer to wait buy now instead to head off higher costs in the future.
By "borrowing" against future sales, some analysts say that the housing market may be setting up for a sharper correction. Instead of pent-up demand, says Economy.com chief economist Mark Zandi, "We'll be having spent-up demand."
Jobs. The economy appears to be improving. In fact, that perception is forcing the rise in mortgage interest rates as bond investors, who supply the capital for home finance, adjust expectations. But against the backdrop of general growth, the economy continues to shed jobs. The 44,000 jobs lost in July marked the sixth consecutive month of declining employment.
Michael Sklarz, chief valuation officer for Santa Barbara, Calif.-based FNIS and Hawai'i economist, says continued softness in the labor market could undercut housing by diminishing consumer confidence. Says Sklarz: "Potential home buyers need to feel secure. The job market, rather than mortgage rates, may be the most important factor to watch."
Credit standards. Credit standards have eased over the past decade, as lenders permit smaller down payments and easier terms. And millions of homeowners have tapped into growing home equity through second mortgages or by taking extra cash when refinancing.
Tuccillo, the Virginia consultant, says years of homeowners supporting themselves "by looting the equity in their homes" puts many in financial peril. That, he and others say, could unleash a flood of market-depressing foreclosures.
Thomas A. Fogarty, USA Today