Advanced Search
MyIDEAS: Login

Do Households Benefit from Financial Deregulation and Innovation? The Case of the Mortgage Market

Contents:

Author Info

  • Kristopher Gerardi

    (Federal Reserve Bank of Boston)

  • Harvey S. Rosen

    (Princeton University)

  • Paul Willen

    (Federal Reserve Bank of Boston)

Registered author(s):

    Abstract

    The U.S. mortgage market has experienced phenomenal change over the last 35 years. Most observers believe that the deregulation of the banking industry and financial markets generally has played an important part in this transformation. This paper develops and implements a technique for assessing the impact of changes in the mortgage market on individuals and households. Our analysis is based on an implication of the permanent income hypothesis: that the higher a household’s future income, the more it desires to spend and consume, ceteris paribus. If we have perfect credit markets, then desired consumption matches actual consumption and current spending on housing should forecast future income. Since credit market imperfections mute this effect, we can view the strength of the relationship between housing spending and future income as a measure of the “imperfectness” of mortgage markets. Thus, a natural way to determine whether mortgage market developments have actually helped households by decreasing market imperfections is to see whether this link has strengthened over time. We implement this framework using panel data going back to 1969. We find that over the past several decades, housing markets have become less imperfect in the sense that households are now more able to buy homes whose values are consistent with their long-term income prospects. One issue that has received particular attention is the role that the housing Government Sponsored Enterprises (GSEs), Fannie Mae and Freddie Mac, have played in improving the market for housing finance. We find no evidence that the GSEs’ activities have contributed to this phenomenon. This is true whether we look at all homebuyers, or at subsamples of the population whom we might expect to benefit particularly from GSE activity, such as lowincome households and first-time homebuyers.

    Download Info

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
    File URL: http://www.princeton.edu/ceps/workingpapers/141rosen.pdf
    Download Restriction: no

    Bibliographic Info

    Paper provided by Princeton University, Department of Economics, Center for Economic Policy Studies. in its series Working Papers with number 61.

    as in new window
    Length:
    Date of creation: Mar 2007
    Date of revision:
    Handle: RePEc:pri:cepsud:141rosen

    Contact details of provider:
    Postal: Princeton, NJ 08544-1021
    Phone: (609) 258-5765
    Fax: (609) 258-5398
    Email:
    Web page: http://www.princeton.edu/~ceps/index.htm
    More information through EDIRC

    Related research

    Keywords:

    Find related papers by JEL classification:

    This paper has been announced in the following NEP Reports:

    References

    References listed on IDEAS
    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.:
    as in new window
    1. Charles Himmelberg & Christopher Mayer & Todd Sinai, 2005. "Assessing high house prices: bubbles, fundamentals, and misperceptions," Staff Reports 218, Federal Reserve Bank of New York.
    2. Engelhardt, Gary V, 1996. "Consumption, Down Payments, and Liquidity Constraints," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 28(2), pages 255-71, May.
    3. Goodfriend, Marvin & King, Robert G., 2005. "The incredible Volcker disinflation," Journal of Monetary Economics, Elsevier, vol. 52(5), pages 981-1015, July.
    4. Ladd, Helen F, 1982. "Equal Credit Opportunity: Women and Mortgage Credit," American Economic Review, American Economic Association, vol. 72(2), pages 166-70, May.
    5. Alicia H. Munnell, 1992. "Mortgage lending in Boston: interpreting HMDA data," Working Papers 92-7, Federal Reserve Bank of Boston.
    6. Bubnys, Edward L & Khaksari, Shahriar & Tarimcilar, Murat, 1993. "Intermarket Efficiency: An Application of Interbattery APT to Mortgage-Backed Securities," The Journal of Real Estate Finance and Economics, Springer, vol. 7(2), pages 99-115, September.
    7. Milton Friedman, 1957. "A Theory of the Consumption Function," NBER Books, National Bureau of Economic Research, Inc, number frie57-1.
    8. Mayo, Stephen K., 1981. "Theory and estimation in the economics of housing demand," Journal of Urban Economics, Elsevier, vol. 10(1), pages 95-116, July.
    9. David Card & John E. DiNardo, 2002. "Skill-Biased Technological Change and Rising Wage Inequality: Some Problems and Puzzles," Journal of Labor Economics, University of Chicago Press, vol. 20(4), pages 733-783, October.
    10. Ambrose, Brent W. & Thibodeau, Thomas G., 2004. "Have the GSE affordable housing goals increased the supply of mortgage credit?," Regional Science and Urban Economics, Elsevier, vol. 34(3), pages 263-273, May.
    11. Bai, Jushan, 1999. "Likelihood ratio tests for multiple structural changes," Journal of Econometrics, Elsevier, vol. 91(2), pages 299-323, August.
    12. Elena Loutskina & Philip E. Strahan, 2006. "Securitization and the Declining Impact of Bank Finance on Loan Supply: Evidence from Mortgage Acceptance Rates," NBER Working Papers 11983, National Bureau of Economic Research, Inc.
    13. Polinsky, A Mitchell & Ellwood, David T, 1979. "An Empirical Reconciliation of Micro and Grouped Estimates of the Demand for Housing," The Review of Economics and Statistics, MIT Press, vol. 61(2), pages 199-205, May.
    14. Dwight Jaffee, 2003. "The Interest Rate Risk of Fannie Mae and Freddie Mac," Journal of Financial Services Research, Springer, vol. 24(1), pages 5-29, August.
    15. Rudolph, Patricia M. & Griffith, John, 1997. "Integration of the Mortgage Market into the National Capital Markets: 1963-1993," Journal of Housing Economics, Elsevier, vol. 6(2), pages 164-183, June.
    16. Passmore, Wayne & Sparks, Roger & Ingpen, Jamie, 2002. "GSEs, Mortgage Rates, and the Long-Run Effects of Mortgage Securitization," The Journal of Real Estate Finance and Economics, Springer, vol. 25(2-3), pages 215-42, Sept.-Dec.
    17. Artle, Roland & Varaiya, Pravin, 1978. "Life cycle consumption and homeownership," Journal of Economic Theory, Elsevier, vol. 18(1), pages 38-58, June.
    18. Milton Friedman, 1957. "Introduction to "A Theory of the Consumption Function"," NBER Chapters, in: A Theory of the Consumption Function, pages 1-6 National Bureau of Economic Research, Inc.
    Full references (including those not matched with items on IDEAS)

    Citations

    Lists

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    Statistics

    Access and download statistics

    Corrections

    When requesting a correction, please mention this item's handle: RePEc:pri:cepsud:141rosen. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (David Long).

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.