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As inflation grows, the adjustable-rate mortgage makes a comeback in Idaho

Boise - Housing - 2021
Otto Kitsinger
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A house for sale in the North End of Boise on March 21, 2021. (Otto Kitsinger for Idaho Capital Sun)

More homebuyers choosing loan option that was a hallmark of 1980s inflationary period

A home loan made famous by the 1980s era of double-digit interest rates — then made infamous by the mid-2000s mortgage crisis — is making a comeback in Idaho.

The Federal Reserve, the country’s central banking system, is raising interest rates. As a result, mortgage lenders such as Zions Bank report more homebuyers are opting for less traditional methods of financing, even though those methods might be riskier for the borrower.

The trend is also happening nationally, according to Bloomberg.

Homebuyers typically choose long-term fixed rate mortgages over adjustable-rate mortgages, which have interest rates that start lower but increase over time, such as after five or 10 years. Jared Cook, production sales manager for Zions Bank in Idaho, said because many people refinance a home loan before the point when the rate would go up anyway, it can be a more attractive option.

“Our current pipeline is 70% (adjustable-rate mortgages) right now, and historically we’re usually more like 50%,” Cook said. “It just is a good alternative to get people into homes that probably wouldn’t be able to get into a home otherwise. The interest rates going up have priced many out of the market, so this is an alternate way that you might be able to still afford a home.”

University of Idaho economics professor Steven Peterson said adjustable-rate mortgages are a product of 1980s inflationary problems. He wasn’t a fan of them as a financing option when he worked as a real estate agent, he said, because the economy is unpredictable and a borrower could end up with a much larger monthly payment than planned.

“I think one’s got to be very cautious to take on an (adjustable-rate mortgage), because it’s directly shifting the risk onto the borrower,” Peterson said.

Even if a borrower intends to refinance, he said, “You’re making a gamble that all your financial ducks are lined up in such a way that you can take out a new loan. In turbulent economic times, there’s no guarantee of that.”

Susan Semba, executive vice president of homeownership lending at the Idaho Housing and Finance Association, said she has an adjustable-rate mortgage of her own, and it depends on the buyer’s situation as to whether or not it’s a good idea. A younger person whose income will likely go up over time or who will move into another home within five to eight years is probably in a better position to take out that type of loan than someone who will soon retire, she said.

“I think that’s really key to what we’re going through right now, is just understanding the situation of the home buyer,” Semba said.

The Fed pumps the brakes on inflation by making it more expensive to borrow

A study released by the University of Idaho in December about housing affordability in Kootenai County showed that for every 1% increase in mortgage interest rates, the dollar amount of the home a buyer can afford decreases by about $50,000.

If an interest rate increases from 3.18% to 5.25% — as it did between December and today, according to Freddie Mac — it works out to an increase of about $631 in monthly mortgage payments, said Peterson.

The housing market across Idaho, and especially in the Treasure Valley, is still seeing high demand, even as rates increase.

According to data from Boise Regional Realtors, the median sales price for homes in Ada County reached $595,000 in April — up nearly 24% from the same month in 2021, and a new record.

The Federal Reserve announced earlier this month that it would raise long-term interest rates by half a percentage point, the largest increase since 2000, in an effort to cool the market and control inflation. As of this week, the inflation rate stood at 8.3%, according to the U.S. Bureau of Labor Statistics, with prices for food, gas and other costs rising at rates the country has not seen since the early 1980s.

Federal Reserve Chairman Jerome Powell said the agency will continue raising interest rates until it has the desired effect of stabilizing consumer prices.

More inventory will be key for Idaho housing market

Cook said there has also been a 20% increase in construction loans through Zions Bank compared to this month in 2021, so there is hope that more homes being built means an increase in inventory for homebuyers. That could help with home prices in the Treasure Valley area.

Data from Boise Regional Realtors showed a 170% increase in inventory in April compared with April 2021.

“I’ve been doing a lot of sales calls … with people in Nampa and Caldwell, and they’re still seeing multiple offers,” Cook said. “The low end to moderate (priced market) is just very difficult still out there, there’s a lot of demand for those homes. I’ve heard the same in Boise.”

Peterson said inventory issues are a leftover consequence of the Great Recession, when home construction nearly ground to a halt between 2008 and 2018. When interest rates dipped to historic lows of 3% and 4% over the past two years, it drove demand for a limited supply of homes — which, in turn, helped fuel the rapid inflation of housing prices in Idaho.

Even though home construction is rebounding, it is still hampered by supply chain and labor shortages, said Semba.

“I know a lot of lenders, and one told me not long ago that he probably had 100 people in his pipeline just waiting to buy a house,” Semba said. “So until we solve that and have more product, we’re going to continue to see the values go up.”

Semba said the Idaho Housing and Finance Association has increased the loan options for its down payment assistance programs to help people afford homes, and the organization is working with developers to build more apartments and workforce housing.

“It’s kind of a daunting experience we’re going through, so we’re learning a lot from it, that’s for sure,” Semba said. “And (we are) trying to think outside of that box we always seem to be in, and think of opportunities that we did at one time but quit doing, like the adjustable-rate mortgages and other flexible options.”