LOS Angeles -- Adjustable-rate mortgages are not a concern now, but they could cause problems for Southern California homeowners in three to seven years as these loans convert from fixed to adjustable rates, according to Raphael Bostic of the University of Southern California Lusk Center for Real Estate.
"If interest rates increase, some buyers may not be able to afford higher payments and may have to sell their homes," said Mr. Bostic, a former Fed economist who specializes in tracking the home mortgage market.
"This could cause a sudden rush of homes on the Southern California market and depress prices," he explained.
ARMs recently have accounted for about a third of new loan applications nationally, the highest in a decade. Some lenders also have packaged ARMS with interest-only, 100% financing. While ARMs are a long-term concern, Southern California is not in immediate danger of a housing bubble, Mr. Bostic noted.
"As interest rates increase, the region's home sales will slow to more moderate but sustainable levels, and prices will increase more slowly," he explained.
Mr. Bostic pointed to the region's employment growth and continued demand for housing as evidence that home prices are not being artificially inflated. He said he also doesn't see speculative buyers creating problems because they account for just a fraction of Southern California's home purchases.