Mortgage plans mirror hot housing markets

By Amy Strahan
BLOOMBERG NEWS

Adjustable-rate mortgages are increasingly popular with first-time homebuyers in regions where home price appreciations outpace gains in personal income, regulators say.

The largest gaps between increases in personal incomes and home values were reported in Nevada, Hawaii, California, Washington, D.C., and Maryland, according to Bureau of Economic Statistics data compiled by bank regulators.

The percentage of adjustable-rate mortgages rose to 46 percent of home loans in 2004 from 18 percent the previous year in Nevada and doubled to 58 percent from 29 percent in California, according to the Federal Housing Finance Board.

"Affordability is becoming a major issue, and some of the innovations we're seeing in mortgage products are really homebuyers trying to qualify for mortgages in these very expensive markets," Rich Brown, the Federal Deposit Insurance Corp.'s chief economist, told reporters this week.

The FDIC calculates that booming housing markets envelop 25 percent of the U.S. population and account for 40 percent of home values.

The gap between home prices and incomes last year was widest in California and Nevada. In California, prices rose 22 percent and incomes 4.8 percent; in Nevada, home prices surged 28 percent while incomes rose 4.7 percent, the FDIC said. In states like New York, New Jersey and Pennsylvania, home prices last year rose at roughly twice the rate as incomes.

The FDIC and other banking regulators are studying the correlation between new adjustable-rate mortgage products, including interest-only loans, and higher home prices.

The studies are designed "to understand the extent to which these new credit factors may be contributing to home price growth," said Barbara Ryan, associate director of the FDIC's division of insurance and research.

Home appreciations rose faster than personal incomes in 39 out of the 50 states in the nation. The exceptions were Alabama, Mississippi, Tennessee, Indiana, Iowa, North Dakota, South Dakota, Colorado, Oklahoma, Texas and Utah.