Steep drop in California ARM use

March 23, 2006

La Jolla, CA----The use of adjustable-rate mortgages for home purchases has declined significantly in California during the past three months, the result of more caution among buyers and lenders in a market that is seeing slowing increases in home values, a real estate information service reported.

In February 51.9 percent of all home buyers financed their purchases with an ARM, down from 63.7 percent in January, 68.7 percent in December and 70.9 percent in November, according to DataQuick Information Systems.

The use of ARMs, which are easier to get and are considered by many to be an indication that buyers are stretching their finances, peaked in May last year at 73.7 percent. Peak usage during the prior real estate cycle was in September 1988 when ARMs accounted for 66.1 percent of all home purchase loans.

"Some of the financing issues at play here are fairly complex and would include this year's higher conforming loan limit, the spread between the cost of an ARM and a fixed-rate mortgage, use of equity lines, and federal regulators who have recently told lenders to lower risk levels," said Marshall Prentice, DataQuick president.

"It's a lot easier to loan somebody money when the collateral is going up in value at more than twenty percent a year, than when values are going up at half that rate. What we have here is a market cycle that has passed its frenzy phase and is moving into more balanced territory," said Marshall Prentice, DataQuick president.

The median price paid for a California home was $457,000 in February, up 12.3 percent from $407,000 for the same month last year. The year-ago median was up 21.1 percent from $336,000 twelve months earlier. The annual increase statewide peaked in May 2004 when the median of $382,000 was up 23.2 percent from $310,000 a year earlier.

DataQuick, a subsidiary of Vancouver-based MacDonald Dettwiler and Associates, monitors real estate activity nationwide and provides information to consumers, educational institutions, public agencies, lending institutions, title companies and industry analysts.

Other trends also indicate low levels of market volatility.

February buyers financed 78.8 percent of their purchase with a first mortgage, down from 79.1 percent a year ago and 80.5 percent two years ago.

Seller financing, which was very popular in the late 1980s, is at very low levels.

Flipping sales, where the seller owned the home six months or less, accounted for 3.3 percent of the market in February, down from 3.7 percent a year ago.

Absent-owner purchases accounted for 15.2 percent of February's sales, down from 15.8 percent a year ago, DataQuick reported.

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