Sell Before the ARMs Race
By Francis Lopez, Director of Listings
The housing inventory on the peninsula has continued its momentous decline over the past several years. This can be attributed to interest rates in two intertwined ways: (1) with interest rates above 6%, homeowners have been hesitant to move, instead opting to stay in their current home; and (2) many homeowners are enjoying the historically low interest rates from their purchase or refinance in 2020-2022, some as low as 2%.
While inventory has seen an uptick over the past year as home sellers have become more comfortable with interest rates, and no indications that we will ever see rates as low as during the pandemic, there is an upcoming concern that we may see the number of homes on the market rise dramatically. This, too, can be credited to a common type of mortgage home buyers acquired during the pandemic: adjustable-rate mortgages.
Adjustable-rate mortgages (ARMs) are mortgages in which the borrower has an interest rate locked in for set amount of time before the rate readjusts to the current market rates. These ARMs are commonly set for 5-, 7-, or 10-year terms. Not quite as common as the traditional 30-year mortgage, these ARMs typically include lower initial interest rates and can offer homebuyers an opportunity to purchase a home they otherwise would not be able to. After the 5-, 7-, or 10-year term, the interest rate adjusts depending on the difference between their initial rate and the current rates. But with the incredibly low rates secured by homebuyers during the pandemic, each of these ARMs will soon see increased rates across the board as their initial rates expire.
According to the Urban Institute, data for ARMs originating between 2020-2022 show 19.5% of ARMs are set to adjust in 5 years, 47.8% in 7 years, and 32.7% in 10 years.1 The first set of ARM rates have begun to reset, but the vast majority will adjust in the next 2-3 years. All of this points to one fact: an alarming number of homeowners will soon see their interest rates increase, with many seeing their monthly payments almost double. The reality is that many homeowners will soon be forced to move and sell their home. And with 67% of the pandemic-era ARMs likely coming to the end of their terms over the next few years, this will cause a rush of homes onto the market. These home sellers may also face increased desperation to sell their home to avoid the increased cost, and with increased competition, may result in lower home sale prices across the board.
The current housing market has remained steady with lower inventory and buyers accustomed to the current interest rates. But the ticking time-bomb of adjustable-rate mortgages will change the market dramatically in 2027 and beyond, with a large supply of homes slated to enter the market. If you are considering selling your home in the next year, reach out to DeLeon Realty today to see how we can provide you with the best home selling experiences before the ARMs race starts.
1Citation from the Urban Institute: 1. https://www.urban.org/urban-wire/should-borrowers-be-afraid-adjustable-rate-mortgages
Francis Lopez (DRE #02119541) | francis@deleonrealty.com | 650.407.0160
DeLeon Realty, Inc. | DRE #01903224 | Equal Housing Opportunity
