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Alternative Mortgage Instruments, Qualification Constraints and the Demand for Housing: An Empirical Analysis

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  • Richard A. Phillips
  • James H. VanderHoff

Abstract

Government-guaranteed mortgage loans (GFRMs) and adjustable-rate mortgages (ARMs) were introduced to make payment to income (PTI) and loan-to-value (LTV) qualification conventions less restrictive. This paper analyzes the effect of GFRMs and ARMs on the demand for housing. Using a large national data set for the 1988 to 1989 period, we employ a two-stage procedure to estimate housing demand. In the first stage, a multinomial logit model estimates the probability of choosing an FRM, ARM or GFRM. Predicted values from the logit are used to construct user costs and estimate housing demand. Using the model estimates, we simulate demand under four different mortgage availability regimes: FRM, FRM and GFRM, FRM and ARM and all three. These simulations indicate that GFRMs, by relaxing LTV constraints, increase housing demand by approximately 6.2% relative to the FRM regime; the addition of ARMs, by relaxing both PTI and LTV constraints, raises demand by an additional 6%, for a total of 12.2% with inclusion of all alternatives. Copyright American Real Estate and Urban Economics Association.

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Bibliographic Info

Article provided by American Real Estate and Urban Economics Association in its journal Real Estate Economics.

Volume (Year): 22 (1994)
Issue (Month): 3 ()
Pages: 453-477

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Handle: RePEc:bla:reesec:v:22:y:1994:i:3:p:453-477

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Cited by:
  1. Masaki Mori & Julian Diaz III & Alan J. Ziobrowski, 2009. "Why Do Borrowers Choose Adjustable-Rate Mortgages over Fixed-Rate Mortgages? : A Behavioral Investigation," International Real Estate Review, Asian Real Estate Society, vol. 12(2), pages 98-120.
  2. D. Duffy & M.J. Roche, 2005. "Heterogeneous Homebuyers, Mortgage Choice and the use of Mortgage Brokers," Economics, Finance and Accounting Department Working Paper Series n1520205, Department of Economics, Finance and Accounting, National University of Ireland - Maynooth.
  3. Philomena M. Bacon & Peter Moffatt, 2010. "Mortgage Choice as a Natural Field Experiment on Choice Under Risk," University of East Anglia Applied and Financial Economics Working Paper Series 020, School of Economics, University of East Anglia, Norwich, UK..

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