Study: Homeowners with ARMs Increased Spending Despite Drop in Home Values

Homeowners with adjustable-rate mortgages significantly increased their spending both before and after anticipated mortgage payment decreases, despite a substantial drop in their home values, according to data from The JPMorgan Chase Institute, Washington, D.C.

The Consumer Spending Response to Mortgage Resets: Microdata on Monetary Policy report used 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.

“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,” the study said. “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 five years before reset.”

The study said homeowners used the savings from lower ARM payments to make more purchases across all spending categories. 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.

“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 of the 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.”

Other key study findings:

–Forty-four percent of homeowners in the sample experienced a large drop in their hybrid ARM payment at reset, which on average represented more than 5 percent of their monthly income. They realized an average of $747 in monthly savings upon reset; these savings were equivalent to more than 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 ratios considerably higher.

–Homeowners increased their spending by 9 percent in advance of the anticipated drop in their mortgage payments, or $289 per month, and by 15 percent after reset, or $488 per month, despite the drop in housing wealth.

–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.

–Homeowners used the savings from lower hybrid ARM payments to make more purchases across all spending categories, notably home improvements and healthcare.