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Mortgage Timing

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Author Info
Ralph S.J Koijen
Otto Van Hemert
Stijn Van Nieuwerburgh

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Abstract

The fraction of newly-originated mortgages that are of the adjustable-rate (ARM) versus the fixed-rate (FRM) type exhibits a surprising amount of time variation. A simple utility framework of mortgage choice points to the bond risk premium as theoretical determinant: when the bond risk premium is high, FRM payments are high, making ARMs more attractive. We confirm empirically that the bulk of the time variation in household mortgage choice can be explained by time variation in the bond risk premium. This is true regardless of whether bond risk premia are measured using forecasters' data, a VAR term structure model, or a simple rule-of-thumb based on adaptive expectations. This simple rule-of-thumb moves in lock-step with mortgage choice, thereby lending further credibility to a theory of strategic mortgage timing by households.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 13361.

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Date of creation: Sep 2007
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Handle: RePEc:nbr:nberwo:13361

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Find related papers by JEL classification:
D14 - Microeconomics - - Household Behavior - - - Personal Finance
E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Determination of Interest Rates; Term Structure of Interest Rates
G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
R2 - Urban, Rural, and Regional Economics - - Household Analysis

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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Robin Greenwood & Dimitri Vayanos, 2008. "Bond Supply and Excess Bond Returns," NBER Working Papers 13806, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  2. Yuliya Demyanyk & Otto Van Hemert, 2007. "Understanding the subprime mortgage crisis," Supervisory Policy Analysis Working Papers 2007-05, Federal Reserve Bank of St. Louis. [Downloadable!]
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