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Innovations in mortgage markets and increased spending on housing

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  • Mark Doms
  • John Krainer

Abstract

Over the past several decades, innovations in the mortgage market have benefited consumers through a variety of channels. Innovations include the lowering of down payment requirements, increased flexibility in repayment schedules, and the reduction of costs associated with extracting equity from homes. To ascertain the ways in which these innovations would alter spending on housing, we develop a model of the home buying and mortgage choice decision that produces a number of testable implications. For instance, the lowering of down payment requirements should result in homeownership rates increasing, especially for households that are traditionally cash constrained. In fact, we show that between 1994 and 2004, the homeownership rate for young and low-income households rose sharply. Increased flexibility of repayment schedules should assist households in smoothing their housing consumption choices. Empirically, we document that households have increased the share of their income spent on housing by a substantial margin. The result is robust to the changing composition of households and also to regional location. Households that have been traditionally cash constrained have increased their housing expenditures but tend to have low mortgage rates, suggesting that these households may be financing their increased housing consumption with alternative, flexible mortgage products.

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Bibliographic Info

Paper provided by Federal Reserve Bank of San Francisco in its series Working Paper Series with number 2007-05.

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Date of creation: 2007
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Handle: RePEc:fip:fedfwp:2007-05

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Keywords: Mortgages ; Housing - Finance;

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References

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  1. Richard K. Green & Susan M. Wachter, 2005. "The American Mortgage in Historical and International Context," Working Paper, USC Lusk Center for Real Estate 9094, USC Lusk Center for Real Estate.
  2. François Ortalo-Magné & Sven Rady, 2002. "Housing Market Dynamics: On the Contribution of Income Shocks and Credit Constraints," Wisconsin-Madison CULER working papers, University of Wisconsin Center for Urban Land Economic Research 02-01, University of Wisconsin Center for Urban Land Economic Research.
  3. Campbell, John & Cocco, Joao, 2003. "Household Risk Management and Optimal Mortgage Choice," Scholarly Articles 3157876, Harvard University Department of Economics.
  4. LeRoy, Stephen F, 1996. "Mortgage Valuation under Optimal Prepayment," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 9(3), pages 817-44.
  5. Alm, James & Follain, James R., 1984. "Alternative Mortgage Instruments, the Tilt Problem, and Consumer Welfare," Journal of Financial and Quantitative Analysis, Cambridge University Press, Cambridge University Press, vol. 19(01), pages 113-126, March.
  6. Wenli Li, 2005. "Moving up: trends in homeownership and mortgage indebtedness," Business Review, Federal Reserve Bank of Philadelphia, Federal Reserve Bank of Philadelphia, issue Q1, pages 26-34.
  7. Bostic, Raphael W & Surette, Brian J, 2001. "Have the Doors Opened Wider? Trends in Homeownership Rates by Race and Income," The Journal of Real Estate Finance and Economics, Springer, Springer, vol. 23(3), pages 411-34, November.
  8. Koijen, Ralph S.J. & Hemert, Otto Van & Nieuwerburgh, Stijn Van, 2009. "Mortgage timing," Journal of Financial Economics, Elsevier, Elsevier, vol. 93(2), pages 292-324, August.
  9. Rui Yao, 2005. "Optimal Consumption and Portfolio Choices with Risky Housing and Borrowing Constraints," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 18(1), pages 197-239.
  10. Jan K. Brueckner, 1984. "The Flexible Mortgage: Optimal Financing of a Consumer Durable," Real Estate Economics, American Real Estate and Urban Economics Association, American Real Estate and Urban Economics Association, vol. 12(2), pages 136-152.
  11. Yamashita, Takashi, 2003. "Owner-occupied housing and investment in stocks: an empirical test," Journal of Urban Economics, Elsevier, vol. 53(2), pages 220-237, March.
  12. Jeffrey R. Campbell & Zvi Hercowitz, 2006. "The macroeconomic transition to high household debt," Proceedings, Federal Reserve Bank of San Francisco, Federal Reserve Bank of San Francisco, issue Nov.
  13. Richard Stanton & Nancy Wallace, 1998. "Mortgage Choice: What's the Point?," Real Estate Economics, American Real Estate and Urban Economics Association, American Real Estate and Urban Economics Association, vol. 26(2), pages 173-205.
  14. Campbell, John, 2006. "Household Finance," Scholarly Articles 3157877, Harvard University Department of Economics.
  15. David H. Autor & Lawrence F. Katz & Melissa S. Kearney, 2005. "Trends in U. S. Wage Inequality: Re-Assessing the Revisionists," Harvard Institute of Economic Research Working Papers 2095, Harvard - Institute of Economic Research.
  16. Hurst, Erik & Stafford, Frank, 2004. "Home Is Where the Equity Is: Mortgage Refinancing and Household Consumption," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 36(6), pages 985-1014, December.
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Citations

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Cited by:
  1. John V. Duca & John Muellbauer & Anthony Murphy, 2011. "Shifting credit standards and the boom and bust in U.S. house prices," Working Papers, Federal Reserve Bank of Dallas 1104, Federal Reserve Bank of Dallas.
  2. Duca, John V & Muellbauer, John & Murphy, Anthony, 2011. "House Prices and Credit Constraints: Making Sense of the US Experience," CEPR Discussion Papers, C.E.P.R. Discussion Papers 8360, C.E.P.R. Discussion Papers.
  3. Ebrahim, M. Shahid & Shackleton, Mark B. & Wojakowski, Rafal M., 2011. "Participating mortgages and the efficiency of financial intermediation," Journal of Banking & Finance, Elsevier, Elsevier, vol. 35(11), pages 3042-3054, November.
  4. Fred Furlong & Yelena Takhtamanova, 2012. "Did the housing boom affect mortgage choices?," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue nov5.
  5. Gete, Pedro, 2009. "Housing Markets and Current Account Dynamics," MPRA Paper 20957, University Library of Munich, Germany, revised 24 Feb 2010.
  6. Sophocles N. Brissimis & Thomas Vlassopoulos, 2007. "The Interaction between Mortgage Financing and Housing Prices in Greece," Working Papers, Bank of Greece 58, Bank of Greece.
  7. Michelle J. White, 2008. "Bankruptcy: Past Puzzles, Recent Reforms, and the Mortgage Crisis," NBER Working Papers 14549, National Bureau of Economic Research, Inc.
  8. Olga Gorbachev & Keshav Dogra, 2010. "Evolution of Consumption Volatility for the Liquidity Constrained Households over 1983 to 2004," Working Papers, University of Delaware, Department of Economics 10-12, University of Delaware, Department of Economics.
  9. John Krainer, 2006. "Mortgage innovation and consumer choice," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue dec29.

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