A new JPMorgan Chase Institute report highlights the link between interest rate changes and consumer spending for homeowners with adjustable-rate vs. fixed-rate mortgages.
The study, released on Thursday, could provide valuable insight to housing policy makers regarding how their actions affect the type of mortgage a homeowner chooses as well as how they impact the consumption habits of homeowners with ARMs, compared to those with fixed rates, throughout the business cycle.
From Chase’s 6 million mortgage customers, the study focused on a group of 4,321 homeowners meeting specific criteria, including having a hybrid adjustable-rate mortgage originating between 2005 and 2007 and a Chase credit card active during the prior 24 months. The predictable, lower-interest rate reset at the five-year mark was both preceded and followed by an increase in consumer credit-card spending by the group—even exceeding their mortgage-related savings.
Among the highlights of the report:
- Forty-four percent of the surveyed homeowners experienced a large drop in their hybrid ARM payment at reset, representing more than 5 percent of their monthly income on average.
- Homeowners increased their spending by 9 percent in advance of the mortgage payment drop and by 15 percent afterward. That occurred in spite of the considerable decline in housing value.
- They used credit card borrowing to finance 21 percent of their pre-reset anticipatory spending increase. Post-reset, they further increased their revolving balances. Over the full two-year period studied, the homeowners’ total spending increase exceeded their mortgage-related savings by 4 percent.
- Homeowners applied their mortgage savings across all spending categories, but primarily used their additional funds for home improvements, followed by healthcare, for which they may have been delaying payment.
The 30-year, 5/1 ARMs originated between April 2005 and December 2007, resetting to a lower interest rate and mortgage payment between April 2010 and December 2012 as the Federal Reserve pursued a low-interest-rate policy to reverse the economic stagnation caused by the Great Recession.
The same circumstances also resulted in a dramatic fall in property values. Between origination and reset, median home values for the homeowners surveyed fell by nearly a quarter (or some $84,000).
However, the precipitous dip in home values and the accompanying rising loan-to-value ratio did not rein in the homeowners’ increased spending in response to a rise in their monthly income.
The report’s authors note that a variety of factors and changing market conditions affect the type of mortgages homeowners obtain as well as how their spending habits react to interest rate fluctuations, highlighting the need for additional research to use in contemplating future housing and monetary policy.