Wednesday, June 14, 2006
Kathleen M . Howley
BLOOMBERG NEWS

Nearly a third of U.S. homebuyers chose risky interest-only mortgages in 2005 as a record jump in prices drove affordability to a two-decade low, according to a Harvard University study.

The average mortgage payment in 2005 rose to 24 percent of the U.S. median income after taxes, the highest level since 1984, when it was 25 percent, adjusted for inflation, according to the report issued yesterday by Harvard’s Joint Center for Housing Studies in Cambridge, Massachusetts.

Home prices rose 9.4 percent in 2005, the biggest annual gain in more than 40 years of recordkeeping, the report said. Thirty percent of new mortgages last year were products that allow buyers to skip paying money toward principal, and some allowed deferred interest payments that could result in people owing more than they borrowed, the report said.

“Stretching to afford evermore expensive homes, borrowers increasingly turned to mortgage products other than fixedrate loans to lower their monthly payments,” the report said.

So-called interest-only adjustable-rate mortgages that defer principal payments in the early years of the loan rose to 20 percent of the dollar value of all mortgages last year, the report said. Payment-option adjustable mortgages, often called option-ARMs, rose to 10 percent of the total, the report said.

Payment-option mortgages have introductory rates as low as 1.25 percent and allow buyers to pay a minimal amount that can result in them being “upside down” in the mortgage, or owing more than they borrowed. Interest-only mortgages, with rates currently at about 4.25 percent, allow borrowers to defer paying principal. Both types of 30-year loans were rare two years ago, the study said.

The average U.S. rate for a 30-year fixed mortgage was 6.22 percent last year, and the median home price was a record $219,000. In 1982, rates reached a high of 15 percent, and the median home price was $131,305, the report said.

The most expensive housing market last year was San Jose, Calif., where the median singlefamily house price was $744,500, the report said, citing prices issued by the National Association of Realtors. Second was San Francisco, at $715,700, followed by Los Angeles, at $691,900.