Homeowners with Adjustable-Rate Mortgages Increased Their Spending in Anticipation of Lower Mortgage Payments Despite a Drop ...
April 20 2017 - 9:39AM
Business Wire
New JPMorgan Chase Institute data evaluate
impact of monetary policy on personal spending of US households
with ARMs
Today the JPMorgan Chase Institute released data showing that
homeowners with adjustable rate mortgages (ARMs) significantly
increased their spending both before and after anticipated mortgage
payment decreases, despite a substantial drop in their home values.
As a result of the Federal Reserve’s low interest rate policy, the
mortgage rates of ARMs that reset between 2010 and 2012 dropped
substantially, leading to lower mortgage payments for ARM
borrowers. These homeowners increased their credit card spending by
9 percent in the year before the anticipated drop in their mortgage
payments and by 15 percent in the year after reset, despite a 25
percent drop in their home values over the 5 years before
reset.
Homeowners used the savings from lower ARM payments to make more
purchases across all spending categories. Notably, spending on home
improvements increased the most in both the pre-reset and
post-reset periods, by 20 percent and 26 percent respectively.
Homeowners increased their investment in their homes despite the
fact that home values had dropped by 25 percent since
origination.
The Consumer Spending Response to Mortgage Resets: Microdata on
Monetary Policy report was constructed using de-identified data of
4,321 homeowners who had 30-year 5/1 ARMs that reset between April
2010 and December 2012 and a credit card through Chase. The report
includes an analysis of changes in credit card spending and
revolving balance in the two-year period surrounding ARM reset.
Note that the median income of the sample was approximately
$120,000, which is considerably higher than the Survey of Consumer
Finances median before-tax family income for homeowners in the time
period analyzed.
“These data underscore the impact of easy monetary policy on the
spending of ARM borrowers despite declining home values, and
highlight a segment of borrowers that should be carefully watched
as rates begin to go back up,” said Diana Farrell, President and
CEO, JPMorgan Chase Institute. “As housing policy reforms are
deliberated, consideration should also be given to how those
policies impact which type of mortgage borrowers choose and the
influence those choices have on the ability of monetary policy to
impact personal consumption.”
Following are the key findings from this new report.
- Finding One: 44 percent of the
homeowners in the sample experienced a large drop in their hybrid
ARM payment at reset, which on average represented over 5 percent
of their monthly income.
- The 44 percent of homeowners in the
sample that had a stable amortization schedule – one which was
consistent before and after the mortgage rate reset – realized an
average of $747 in monthly savings upon reset; these savings were
equivalent to over 5 percent of their monthly income.
- In the five years between origination
and reset, the median home value for this group dropped by nearly
$84,000 (25 percent), which pushed loan-to-value (LTV) ratios
considerably higher.
- Finding Two: Homeowners increased
their spending by 9 percent in advance of the anticipated drop in
their mortgage payments and by 15 percent after reset, despite the
considerable drop in housing wealth.
- Average credit card spending increased
by 9 percent relative to baseline, or $289 per month, in the year
preceding the ARM reset; in the year after reset, average spending
increased by 15 percent relative to baseline, or $488 per
month.
- Homeowners increased their spending
despite the fact that their home values had depreciated by nearly
$84,000 (25 percent) since origination.
- Finding Three: Homeowners used
credit card borrowing to finance 21 percent of their pre-reset
anticipatory spending increase, and post–reset they further
increased their revolving balances. Over the full two year period,
their total spending increases exceeded their mortgage-related
savings by 4 percent.
- Average credit card revolving balance
increased by $741 over the 12 month pre-reset period, suggesting
that these homeowners used their credit card to finance 21 percent
of their pre-reset spending increase and funded the remaining 79
percent out of savings.
- Finding Four: Homeowners used the
savings from lower hybrid ARM payments to make more purchases
across all spending categories, notably home improvements and
healthcare.
- Spending on home improvements increased
the most in both the pre-reset and post-reset periods, by 20
percent and 26 percent respectively; homeowners increased their
investment in their homes despite the 25 percent decline in their
home values.
- Spending on healthcare increased 16
percent relative to the baseline in the post-reset period,
suggesting that homeowners may have postponed attending to their
health until after they received a boost in income.
About the JPMorgan Chase Institute
The JPMorgan Chase Institute is a global think tank dedicated to
delivering data-rich analyses and expert insights for the public
good. Its aim is to help decision makers – policymakers,
businesses, and nonprofit leaders – appreciate the scale,
granularity, diversity, and interconnectedness of the global
economic system and use better facts, timely data, and thoughtful
analysis to make smarter decisions to advance global prosperity.
Drawing on JPMorgan Chase & Co.’s unique proprietary data,
expertise, and market access, the Institute develops analyses and
insights on the inner workings of the global economy, frames
critical problems, and convenes stakeholders and leading thinkers.
For more information visit: jpmorganchaseinstitute.com.
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Media:JPMorgan Chase & Co.Nicole Kennedy,
215-864-5732nicole.kennedy@chase.com
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