Will Americans Embrace ARMs Again?

July 11, 2018
Arms focused in a hug
Photo: Unsplash/Pablo Heimplatz

The share of adjustable-rate mortgage (ARM) applications is still lower than it was before the housing crash. With interest rates rising, experts are debating whether or not to expect an uptick in ARMs. 

Chief economist for Freddie Mac Sam Khater does not foresee greater ARM activity, as there would need to be a wider gap between long- and short-term interest rates. Currently, "that spread is collapsing," MarketWatch reports. By contrast, executive vice president for Orange County, Calif. mortgage lender Carrington Mortgage Holdings, Rick Sharga thinks the market will see more ARMs, but not like during the last housing boom when they had about a 20 percent share of total volume. 

The Federal Reserve is nudging short-term rates up, one tick at a time, as it tries to get its crisis-era monetary policy back to normal. Meanwhile, investors keep flocking to longer-dated bonds in the face of unsettled geopolitics, pushing prices up and yields down. For long bonds to shake free and surge higher, Khater said, would likely require a “substantial increase in inflation. I don’t see the kind of rise in inflation that would be needed.”

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