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The Loan Structure and Housing Tenure Decisions in an Equilibrium Model of Mortgage Choice

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Author Info

  • Matt Chambers

    (Towson University)

  • Carlos Garriga

    (Federal Reserve Bank of St. Louis)

  • Don Schlagenhauf

    (Florida State University)

Abstract

The objective of this paper is to understand how loan structure affects (i) the borrower's selection of a mortgage contract and (ii) the aggregate economy. We develop a quantitative equilibrium theory of mortgage choice where households can choose from a menu of long-term (norminal) mortgage loans. The model accounts for observed patterns in housing consumption, ownership, and portfolio allocations. We find that the loan structure is a quantitatively significant factor in a household's housing finance decision. The model suggests that the mortgage structure preferref by a household is dependent on age and income and that loan products with low initial payments offer an alternative to mortgages with no downpayment. These effects are more important when inflation is low. The presence of inflation reduces the real value of the mortgage payment and the outstanding loan over time, thereby reducing mobility. Changes in the structure of mortgages have implications for risk sharing. (Copyright: Elsevier)

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File URL: http://dx.doi.org/10.1016/j.red.2009.01.003
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Bibliographic Info

Article provided by Elsevier for the Society for Economic Dynamics in its journal Review of Economic Dynamics.

Volume (Year): 12 (2009)
Issue (Month): 3 (July)
Pages: 444-468

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Handle: RePEc:red:issued:05-58

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Related research

Keywords: Housing finance; First-time buyers; Life-cycle;

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References

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  1. Ortalo-Magné, François & Rady, Sven, 2001. "Housing Market Dynamics: On the Contribution of Income Shocks and Credit Constraints," CEPR Discussion Papers 3015, C.E.P.R. Discussion Papers.
  2. Morris A. Davis, 2010. "housing and the business cycle," The New Palgrave Dictionary of Economics, Palgrave Macmillan.
  3. Henderson, J Vernon & Ioannides, Yannis M, 1983. "A Model of Housing Tenure Choice," American Economic Review, American Economic Association, vol. 73(1), pages 98-113, March.
  4. Storesletten, Kjetil & Telmer, Chris & Yaron, Amir, 2002. "Consumption and Risk Sharing Over the Life Cycle," Seminar Papers 702, Stockholm University, Institute for International Economic Studies.
  5. James Berkovec & Don Fullerton, 1993. "A General Equilibrium Model of Housing, Taxes, and Portfolio Choice," NBER Working Papers 3505, National Bureau of Economic Research, Inc.
  6. John Y. Campbell, 2006. "Household Finance," NBER Working Papers 12149, National Bureau of Economic Research, Inc.
  7. Joao Cocco & John Campbell, 2004. "Household Risk Management and Optimal Mortgage Choice," Econometric Society 2004 North American Winter Meetings 646, Econometric Society.
  8. Wenli Li & Rui Yao, 2007. "The Life-Cycle Effects of House Price Changes," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 39(6), pages 1375-1409, 09.
  9. Karsten Jeske & Dirk Krueger, 2005. "Housing and the macroeconomy: the role of implicit guarantees for government-sponsored enterprises," Working Paper 2005-15, Federal Reserve Bank of Atlanta.
  10. Wenli Li, 2005. "Moving up: trends in homeownership and mortgage indebtedness," Business Review, Federal Reserve Bank of Philadelphia, issue Q1, pages 26-34.
  11. Matthew Chambers & Carlos Garriga & Don Schlagenhauf, 2007. "Accounting for changes in the homeownership rate," Working Papers 2007-034, Federal Reserve Bank of St. Louis.
  12. José-Víctor Ríos-Rull & Virginia Sánchez-Marcos, 2008. "An Aggregate Economy with Different Size Houses," Journal of the European Economic Association, MIT Press, vol. 6(2-3), pages 705-714, 04-05.
  13. Gervais, Martin, 2002. "Housing taxation and capital accumulation," Journal of Monetary Economics, Elsevier, vol. 49(7), pages 1461-1489, October.
  14. LeRoy, Stephen F, 1996. "Mortgage Valuation under Optimal Prepayment," Review of Financial Studies, Society for Financial Studies, vol. 9(3), pages 817-44.
  15. Fernández-Villaverde, Jesús & Krueger, Dirk, 2011. "Consumption And Saving Over The Life Cycle: How Important Are Consumer Durables?," Macroeconomic Dynamics, Cambridge University Press, vol. 15(05), pages 725-770, November.
  16. Kearl, J R, 1979. "Inflation, Mortgages, and Housing," Journal of Political Economy, University of Chicago Press, vol. 87(5), pages 1115-38, October.
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