Home Prices Fared Best in Markets Where Borrowers Chose Fixed Mortgages

Last updated on October 18th, 2010

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Home prices fell the least in housing markets where most borrowers took out fixed-rate mortgages, according to a perspective by Freddie Mac deputy chief economist Amy Crew Cutts.

Cutts, who praised the fixed-rate mortgage for being an “American Economic Shock Absorber,” noted that home prices are down less than five percent in states where prime, FHA loan, or VA loan long-term fixed-rate mortgages are predominant.

“In fact, home prices have slipped two percent or less in the states with the highest percentages of these mortgages – South Dakota (85 percent), North Dakota (84 percent), and Texas (70 percent),” she wrote in a blog post.

But home values fell on average 39 percent or more from their recent peaks in 2006 or 2007 in areas where exotic and adjustable-rate mortgages festered, thanks in part to payment shock.

Just 51 percent of mortgages in hard-hit Nevada were fixed mortgages – similar numbers are seen in other hot spots like California (52%) and Florida (54%).

Why Did Borrowers Choose ARMs?

The big question is why borrowers in these foreclosure-riddled states chose adjustable-rate mortgages.

Was it out of necessity because home prices were just too high, and electing to take an ARM was the only way to keep the debt-to-income ratio within guidelines?

Or were homeowners tempted by the idea of the option arm, which allowed them to make 1% mortgage payments and bank on the notion of future home price appreciation?

Regardless, fixed-rate mortgages seem to be the hot ticket right now, and that’s certainly not a bad thing going forward if we want to avoid mortgage crisis in the future.

On the flip-side, a study conducted last month found that long-term fixed-rate loans aren’t necessarily the end-all, be-all solution to, ahem, fix housing.

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