Homeowners with Adjustable-Rate Mortgages Increased Their Spending in Anticipation of Lower Mortgage Payments Despite a Drop in
WASHINGTON , April 20 /Businesswire/ - 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.
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.