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Home Is Where the Equity Is: Mortgage Refinancing and Household Consumption

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Author Info
Hurst, Erik
Stafford, Frank

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Abstract

Applying a permanent income model with exogenous liquidity constraints and mortgage behavior, household refinancing when mortgage interest rates are historically high and rising, a persistent empirical puzzle, is explained. Using data from the Panel Study of Income Dynamics, households experiencing an unemployment shock and having limited initial liquid assets to draw upon are shown to have been 25% more likely to refinance, 1991-94. On average, such liquidity-constrained households converted over two-thirds of every dollar of equity they removed into current consumption as mortgage rates plummeted, 1991-94, producing an estimated expenditure stimulus of at least $28 billion.

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Publisher Info
Article provided by Blackwell Publishing in its journal Journal of Money, Credit and Banking.

Volume (Year): 36 (2004)
Issue (Month): 6 (December)
Pages: 985-1014
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Handle: RePEc:mcb:jmoncb:v:36:y:2004:i:6:p:985-1014

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Web page: http://www.blackwellpublishing.com/journal.asp?ref=0022-2879

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  1. Atif Mian & Amir Sufi, 2008. "The Consequences of Mortgage Credit Expansion: Evidence from the 2007 Mortgage Default Crisis," NBER Working Papers 13936, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  2. Richard Blundell & Luigi Pistaferri & Ian Preston, 2004. "Imputing consumption in the PSID using food demand estimates from the CEX," IFS Working Papers W04/27, Institute for Fiscal Studies. [Downloadable!]
  3. Souphala Chomsisengphet & Anthony Pennington-Cross, 2006. "Subprime refinancing: equity extraction and mortgage termination," Working Papers 2006-023, Federal Reserve Bank of St. Louis. [Downloadable!]
    Other versions:
  4. Andrew Benito & Haroon Mumtaz, . "Consumption excess sensitivity, liquidity constraints and the collateral role of housing," Bank of England working papers 306, Bank of England. [Downloadable!]
  5. Fang Yang, 2006. "Consumption along the life cycle: how different is housing?," Working Papers 635, Federal Reserve Bank of Minneapolis. [Downloadable!]
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  6. Alan Greenspan & James Kennedy, 2007. "Sources and uses of equity extracted from homes," Finance and Economics Discussion Series 2007-20, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
  7. Sumit Agarwal & John C. Driscoll & David Laibson, 2007. "Optimal Mortgage Refinancing: A Closed Form Solution," NBER Working Papers 13487, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  8. Joseph Gyourko & Joseph Tracy, 2003. "Using home maintenance and repairs to smooth variable earnings," Staff Reports 168, Federal Reserve Bank of New York. [Downloadable!]
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  9. Mark Doms & John Krainer, 2007. "Innovations in mortgage markets and increased spending on housing," Working Paper Series 2007-05, Federal Reserve Bank of San Francisco. [Downloadable!]
  10. Gene Amromin & Jennifer Huang & Clemens Sialm, 2006. "The Tradeoff Between Mortgage Prepayments and Tax-Deferred Retirement Savings," NBER Working Papers 12502, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  11. Grant Scobie & Trinh Le & John Gibson, 2007. "Housing in the Household Portfolio and Implications for Retirement Saving: Some Initial Finding from SOFIE," Treasury Working Paper Series 07/04, New Zealand Treasury. [Downloadable!]
  12. Jonathan McCarthy & Charles Steindel, 2006. "Housing activity, home values, and consumer spending," Proceedings, Federal Reserve Bank of Chicago, pages 78-89. [Downloadable!]
  13. Raj Chetty, 2008. "Moral Hazard vs. Liquidity and Optimal Unemployment Insurance," NBER Working Papers 13967, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  14. Viola Angelini, 2006. "Mortgage Refinancing and Consumption Smoothing," Discussion Papers 06/26, Department of Economics, University of York. [Downloadable!]
  15. Maria Concetta Chiuri & Tullio Jappelli, 2006. "Do the elderly reduce housing equity? An international comparison," CSEF Working Papers 158, Centre for Studies in Economics and Finance (CSEF), University of Salerno, Italy. [Downloadable!]
  16. Andrew Benito, . "Housing equity as a buffer: evidence from UK households," Bank of England working papers 324, Bank of England. [Downloadable!]
  17. Samuel Bentolila & Andrea Ichino, 2008. "Unemployment and consumption near and far away from the Mediterranean," Journal of Population Economics, Springer, vol. 21(2), pages 255-280, April. [Downloadable!] (restricted)
  18. Dimitri B. Papadimitriou & Greg Hannsgen & Gennaro Zezza, 2007. "Cracks in the Foundations of Growth: What Will the Housing Debacle Mean for the U.S. Economy?," Economics Public Policy Brief Archive ppb_90, Levy Economics Institute, The. [Downloadable!]
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