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Mortgage Choice: Interactive Effects of House Price Appreciation and Mortgage Pricing Components

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  • Frederick T. Furlong
  • David Lang
  • Yelena Takhtamanova

Abstract

Research has shown evidence of a link between house price appreciation and the selection of mortgage financing options: Higher appreciation is associated with higher take-up rates for adjustable-rate mortgages relative to fixed-rate mortgages. Research also finds that mortgage interest rates and their underlying components are important determinants of take-up rates among mortgage financing options. In this paper we show that house price appreciation can have important interactive effects with those other determinants of mortgage financing outcomes. We focus on the period from 2000 to 2007, an episode marked by rapid house price appreciation along with a persistent and notable increase in the use of adjustable-rate mortgage financing, including alternative mortgage products. Empirical analysis indicates that higher house price appreciation dampened the estimated effect of the mortgage pricing components on the probabilities of mortgage financing outcomes. The results, which are especially robust for fixed-rate and adjustable-rate mortgages that are fully amortized, are not driven solely by markets with especially high rates of house price appreciation. Moreover, after taking into account the interactive effects with mortgage pricing components, house price appreciation has relatively little additional effect on take-up rates among mortgage financing options.

Suggested Citation

  • Frederick T. Furlong & David Lang & Yelena Takhtamanova, 2019. "Mortgage Choice: Interactive Effects of House Price Appreciation and Mortgage Pricing Components," Working Paper Series 2016-28, Federal Reserve Bank of San Francisco.
    • Handle: RePEc:fip:fedfwp:2016-28
    DOI: 10.24148/wp2016-28
    Note: Previous version published 11/10/2016 as "Mortgage Choice: Interactive Effects of House Price Appreciation and Mortgage Pricing Components", Federal Reserve Bank of San Francisco Working Paper 2016-28; Earlier version published 5/2014 as “Mortgage Choice in the Housing Boom: Impact of House Price Appreciation and Borrower Type", Federal Reserve Bank of San Francisco, Working Paper 2014-05.
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    References listed on IDEAS

    as
    1. Dhillon, Upinder S & Shilling, James D & Sirmans, C F, 1987. "Choosing between Fixed and Adjustable Rate Mortgages: A Note," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 19(2), pages 260-267, May.
    2. Christopher L. Foote & Kristopher Gerardi & Paul S. Willen, 2012. "Why did so many people make so many ex post bad decisions? the causes of the foreclosure crisis," FRB Atlanta Working Paper 2012-07, Federal Reserve Bank of Atlanta.
    3. Michael LaCour‐Little & Jing Yang, 2010. "Pay Me Now or Pay Me Later: Alternative Mortgage Products and the Mortgage Crisis," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 38(4), pages 687-732, Winter.
    4. Baesel, Jerome B. & Biger, Nahum, 1980. "The Allocation of Risk: Some Implications of Fixed versus Index-Linked Mortgages," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 15(2), pages 457-468, June.
    5. Tomasz Piskorski & Alexei Tchistyi, 2011. "Stochastic House Appreciation and Optimal Mortgage Lending," Review of Financial Studies, Society for Financial Studies, vol. 24(5), pages 1407-1446.
    6. Brahima Coulibaly & Geng Li, 2009. "Choice of Mortgage Contracts: Evidence from the Survey of Consumer Finances," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 37(4), pages 659-673, December.
    7. Jan K. Brueckner & Paul S. Calem & Leonard I. Nakamura, 2016. "House‐Price Expectations, Alternative Mortgage Products, and Default," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 48(1), pages 81-112, February.
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    More about this item

    Keywords

    mortgage selection; mortgage choice; mortgage contracts; household finances; fixedrate; adjustable-rate;
    All these keywords.

    JEL classification:

    • D01 - Microeconomics - - General - - - Microeconomic Behavior: Underlying Principles
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • R20 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - General

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