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A Farewell to ARMs or Ever Changing Market Segments?

Author

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  • Bing Chen

    (Shenzhen Audencia Business School - Shenzhen University)

  • Frank P. Stafford

    (University of Michigan)

Abstract

The mortgage market has given rise to a changing and diverse set of borrowers actively using ARMs. Data from the Panel Study of Income Dynamics (PSID) for 2007 and 2013–2015 are used to study borrowing decisions. One view is that an ARM should be offered and taken by those better able to respond to an upward reset. Yet favorable economic conditions induce a demand for mortgages, including by higher risk borrowers, and for these households transactions occur at higher rates, often as ARMs, especially as of 2007. Panel analysis confirms some response to the spread but also to changing demand for mortgages in the shorter run. During the boom, the use of ARMs as a tool for ‘affordability’ led to actual transaction rates exceeding those for fixed rate mortgages. Analysis confirms substantial payment difficulties. Yet, analysis of mortgage transitions, 2007–13, establishes that the ‘affordability’ component to ARM, though less significant, still was present. ARMs were often taken by minorities and those with less education and with family income under $60,000 per year.

Suggested Citation

  • Bing Chen & Frank P. Stafford, 2019. "A Farewell to ARMs or Ever Changing Market Segments?," The Journal of Real Estate Finance and Economics, Springer, vol. 59(4), pages 649-672, November.
    • Handle: RePEc:kap:jrefec:v:59:y:2019:i:4:d:10.1007_s11146-018-9659-y
    DOI: 10.1007/s11146-018-9659-y
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    Cited by:

    1. Katya Kartashova & Xiaoqing Zhou, 2020. "How Do Mortgage Rate Resets Affect Consumer Spending and Debt Repayment? Evidence from Canadian Consumers," Staff Working Papers 20-18, Bank of Canada.

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    More about this item

    Keywords

    Consumption; Liquidity Constraints; Housing Demand; Mortgages;
    All these keywords.

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • R21 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - Housing Demand

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