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Three Cents Worth: Spreading Our ARMs

[This week, our graph guy Jonathan Miller digs into whether the recent dip in mortgage rates is a blip or boon. Click on the image to expand.]

This week, I present the 30-year fixed rate (the conservative mortgage rate used by those generally disconnected with the real word when calculating affordability) and the 1-year adjustable rate mortgage (the poster child for everything that is wrong with the current market) plotted against the average sales price of co-ops and condos adjusted for inflation.

Mortgage rates generally trended downward through the 1990's (except for the 1993-1994 spike in rates), resulting in one of the biggest refinance booms in history and helping many get relief from the cost of high mortgage rates incurred during the 1990-1991 recession. Many of us learned firsthand during this period that falling mortgage rates don't prime the housing pump in terms of activity. Rates were simply dropping in response to a weak economy.

Beginning in late 2001, the second leg of the recent housing boom, the spread between adjustable and fixed rates widened. The sharp drop in short-term rates exaggerated the escalation in housing prices in 2003 through 2005 and seemed to push the market over the edge. This resulted in a drop in the number of sales, as people either were priced out of the market or were nervous about its future.

Although the number of sales are currently rising, it's probably not due exclusively to the modest recent drop in mortgage rates in the second half of 2006. The rate drop over the past six months, while helpful (and hopeful) to some, seems more like a blip relative to recent patterns, but who knows? The financial benefit of the drop is probably more symbolic right now than specifically helpful to the affordability problem.

However, we have observed that a little bit of the edge has come off the frenzied rental market. Those who jumped into rentals last year for safety are confronted with the same decision all over again and it's a more expensive one.
· CPI-Adjusted Sales Price v. Mortgage Rates [Miller Samuel]