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
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.
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.
Finding One: 44 percent of the homeowners in the sample experienced
a large drop in their hybrid ARM payment at reset, which on average
represented over 5 percent of their monthly income.
The 44 percent of homeowners in the sample that had a stable
amortization schedule – one which was consistent before and after
the mortgage rate reset – realized an average of $747 in monthly
savings upon reset; these savings were equivalent to over 5
percent of their monthly income.
In the five years between origination and reset, the median home
value for this group dropped by nearly $84,000 (25 percent), which
pushed loan-to-value (LTV) ratios considerably higher.
- The 44 percent of homeowners in the sample that had a stable
Finding Two: Homeowners increased their spending by 9 percent in
advance of the anticipated drop in their mortgage payments and by 15
percent after reset, despite the considerable drop in housing wealth.
Average credit card spending increased by 9 percent relative to
baseline, or $289 per month, in the year preceding the ARM reset;
in the year after reset, average spending increased by 15 percent
relative to baseline, or $488 per month.
Homeowners increased their spending despite the fact that their
home values had depreciated by nearly $84,000 (25 percent) since
- Average credit card spending increased by 9 percent relative to
Finding Three: Homeowners used credit card borrowing to finance 21
percent of their pre-reset anticipatory spending increase, and
post–reset they further increased their revolving balances. Over the
full two year period, their total spending increases exceeded their
mortgage-related savings by 4 percent.
Average credit card revolving balance increased by $741 over the
12 month pre-reset period, suggesting that these homeowners used
their credit card to finance 21 percent of their pre-reset
spending increase and funded the remaining 79 percent out of
- Average credit card revolving balance increased by $741 over the
Finding Four: Homeowners used the savings from lower hybrid ARM
payments to make more purchases across all spending categories,
notably home improvements and healthcare.
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 25 percent decline in their home values.
Spending on healthcare increased 16 percent relative to the
baseline in the post-reset period, suggesting that homeowners may
have postponed attending to their health until after they received
a boost in income.
- Spending on home improvements increased the most in both the
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.