IDEAS home Printed from https://ideas.repec.org/a/aea/aejpol/v9y2017i1p210-40.html
   My bibliography  Save this article

The Interest Rate Elasticity of Mortgage Demand: Evidence from Bunching at the Conforming Loan Limit

Author

Listed:
  • Anthony A. DeFusco
  • Andrew Paciorek

Abstract

This paper provides novel estimates of the interest rate elasticity of mortgage demand by measuring the degree of bunching in response to a discrete jump in interest rates at the conforming loan limit--the maximum loan size eligible for purchase by Fannie Mae and Freddie Mac. The estimates indicate that a 1 percentage point increase in the rate on a 30-year fixed-rate mortgage reduces first mortgage demand by between 2 and 3 percent. One-third of this response is driven by borrowers who take out second mortgages, which implies that total mortgage debt only declines by 1.5 to 2 percent.

Suggested Citation

  • Anthony A. DeFusco & Andrew Paciorek, 2017. "The Interest Rate Elasticity of Mortgage Demand: Evidence from Bunching at the Conforming Loan Limit," American Economic Journal: Economic Policy, American Economic Association, vol. 9(1), pages 210-240, February.
    • Handle: RePEc:aea:aejpol:v:9:y:2017:i:1:p:210-40
    Note: DOI: 10.1257/pol.20140108
    as

    Download full text from publisher

    File URL: https://www.aeaweb.org/articles?id=10.1257/pol.20140108
    Download Restriction: no
    File URL: https://www.aeaweb.org/articles/attachments?retrieve=HCaAFNo54QdvEcQQfOI2elBY3pIetIJs
    Download Restriction: no
    File URL: https://www.aeaweb.org/articles/attachments?retrieve=Ha6TWZRddar2g7Gmm-6jNN5MtvcX4Z_J
    Download Restriction: no
    File URL: https://www.aeaweb.org/articles/attachments?retrieve=u38b98g8bZOwPaMLbjr1ufM0UGGqd1WY
    Download Restriction: Access to full text is restricted to AEA members and institutional subscribers.
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Martin Browning & Annamaria Lusardi, 1996. "Household Saving: Micro Theories and Micro Facts," Journal of Economic Literature, American Economic Association, vol. 34(4), pages 1797-1855, December.
    2. Orazio P. Attanasio & Pinelopi Koujianou Goldberg & Ekaterini Kyriazidou, 2008. "Credit Constraints In The Market For Consumer Durables: Evidence From Micro Data On Car Loans," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 49(2), pages 401-436, May.
    3. Martins, Nuno C. & Villanueva, Ernesto, 2006. "The impact of mortgage interest-rate subsidies on household borrowing," Journal of Public Economics, Elsevier, vol. 90(8-9), pages 1601-1623, September.
    4. Poterba, James M. & Sinai, Todd, 2011. "Revenue Costs and Incentive Effects of the Mortgage Interest Deduction for Owner-Occupied Housing," National Tax Journal, National Tax Association;National Tax Journal, vol. 64(2), pages 531-564, June.
    5. Best, Michael Carlos & Cloyne, James & Ilzetzki, Ethan & Kleven, Henrik Jacobsen, 2015. "Interest rates, debt and intertemporal allocation: evidence from notched mortgage contracts in the United Kingdom," Bank of England working papers 543, Bank of England.
    6. Day Manoli & Andrea Weber, 2016. "Nonparametric Evidence on the Effects of Financial Incentives on Retirement Decisions," American Economic Journal: Economic Policy, American Economic Association, vol. 8(4), pages 160-182, November.
    7. Jappelli, Tullio & Pistaferri, Luigi, 2007. "Do people respond to tax incentives? An analysis of the Italian reform of the deductibility of home mortgage interests," European Economic Review, Elsevier, vol. 51(2), pages 247-271, February.
    8. Hall, Robert E, 1988. "Intertemporal Substitution in Consumption," Journal of Political Economy, University of Chicago Press, vol. 96(2), pages 339-357, April.
    9. Raj Chetty & John N. Friedman & Tore Olsen & Luigi Pistaferri, 2011. "Adjustment Costs, Firm Responses, and Micro vs. Macro Labor Supply Elasticities: Evidence from Danish Tax Records," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 126(2), pages 749-804.
    10. Alexander M. Gelber & Damon Jones & Daniel W. Sacks, 2013. "Earnings Adjustment Frictions: Evidence From Social Security Earnings Test," Working Papers 13-50, Center for Economic Studies, U.S. Census Bureau.
    11. Gary-Bobo, Robert J. & Larribeau, Sophie, 2004. "A structural econometric model of price discrimination in the French mortgage lending industry," International Journal of Industrial Organization, Elsevier, vol. 22(1), pages 101-134, January.
    12. Matthew D. Shapiro, 2020. "Report of the Editor: American Economic Journal: Economic Policy," AEA Papers and Proceedings, American Economic Association, vol. 110, pages 695-702, May.
    13. Wojciech Kopczuk & David Munroe, 2015. "Mansion Tax: The Effect of Transfer Taxes on the Residential Real Estate Market," American Economic Journal: Economic Policy, American Economic Association, vol. 7(2), pages 214-257, May.
    14. Jonathan Zinman, 2015. "Household Debt: Facts, Puzzles, Theories, and Policies," Annual Review of Economics, Annual Reviews, vol. 7(1), pages 251-276, August.
    15. David B. Gross & Nicholas S. Souleles, 2002. "Do Liquidity Constraints and Interest Rates Matter for Consumer Behavior? Evidence from Credit Card Data," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 117(1), pages 149-185.
    16. Robert M. Dunsky & James R. Follain, 2000. "Tax-Induced Portfolio Reshuffling: The Case of the Mortgage Interest Deduction," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 28(4), pages 683-718.
    17. Anthony A. DeFusco & Andrew Paciorek, 2017. "The Interest Rate Elasticity of Mortgage Demand: Evidence from Bunching at the Conforming Loan Limit," American Economic Journal: Economic Policy, American Economic Association, vol. 9(1), pages 210-240, February.
    18. Sallee, James M. & Slemrod, Joel, 2012. "Car notches: Strategic automaker responses to fuel economy policy," Journal of Public Economics, Elsevier, vol. 96(11), pages 981-999.
    19. Rob Alessie & Stefan Hochguertel & Guglielmo Weber, 2005. "Consumer Credit: Evidence From Italian Micro Data," Journal of the European Economic Association, MIT Press, vol. 3(1), pages 144-178, March.
    20. 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 215-242, Sept.-Dec.
    21. James Poterba & Todd Sinai, 2008. "Tax Expenditures for Owner-Occupied Housing: Deductions for Property Taxes and Mortgage Interest and the Exclusion of Imputed Rental Income," American Economic Review, American Economic Association, vol. 98(2), pages 84-89, May.
    22. Alexander M. Gelber & Damon Jones & Daniel W. Sacks, 2013. "Estimating Earnings Adjustment Frictions: Method and Evidence from the Social Security Earnings Test," NBER Working Papers 19491, National Bureau of Economic Research, Inc.
    23. Emmanuel Saez, 2010. "Do Taxpayers Bunch at Kink Points?," American Economic Journal: Economic Policy, American Economic Association, vol. 2(3), pages 180-212, August.
    24. Henrik J. Kleven & Mazhar Waseem, 2013. "Using Notches to Uncover Optimization Frictions and Structural Elasticities: Theory and Evidence from Pakistan," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 128(2), pages 669-723.
    25. Andreas Fuster & Basit Zafar, 2021. "The Sensitivity of Housing Demand to Financing Conditions: Evidence from a Survey," American Economic Journal: Economic Policy, American Economic Association, vol. 13(1), pages 231-265, February.
    26. Hendershott, Patric H & Shilling, James D, 1989. "The Impact of the Agencies on Conventional Fixed-Rate Mortgage Yields," The Journal of Real Estate Finance and Economics, Springer, vol. 2(2), pages 101-115, June.
    27. Frederic S. Mishkin, 1995. "Symposium on the Monetary Transmission Mechanism," Journal of Economic Perspectives, American Economic Association, vol. 9(4), pages 3-10, Fall.
    28. Dean S. Karlan & Jonathan Zinman, 2008. "Credit Elasticities in Less-Developed Economies: Implications for Microfinance," American Economic Review, American Economic Association, vol. 98(3), pages 1040-1068, June.
    29. Raj Chetty & John N. Friedman & Emmanuel Saez, 2013. "Using Differences in Knowledge across Neighborhoods to Uncover the Impacts of the EITC on Earnings," American Economic Review, American Economic Association, vol. 103(7), pages 2683-2721, December.
    30. Andreas Fuster & James Vickery, 2015. "Securitization and the Fixed-Rate Mortgage," The Review of Financial Studies, Society for Financial Studies, vol. 28(1), pages 176-211.
    31. Brueckner, Jan K., 1994. "The Demand for Mortgage Debt: Some Basic Results," Journal of Housing Economics, Elsevier, vol. 3(4), pages 251-262, December.
    32. James M. Poterba, 1984. "Tax Subsidies to Owner-Occupied Housing: An Asset-Market Approach," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 99(4), pages 729-752.
    33. Manuel Adelino & Antoinette Schoar & Felipe Severino, 2012. "Credit Supply and House Prices: Evidence from Mortgage Market Segmentation," NBER Working Papers 17832, National Bureau of Economic Research, Inc.
    34. Wayne Passmore & Shane M. Sherlund & Gillian Burgess, 2005. "The Effect of Housing Government-Sponsored Enterprises on Mortgage Rates," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 33(3), pages 427-463, September.
    35. Ling, David C. & McGill, Gary A., 1998. "Evidence on the Demand for Mortgage Debt by Owner-Occupants," Journal of Urban Economics, Elsevier, vol. 44(3), pages 391-414, November.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Ma, Chao, 2020. "Per-customer quantity limit and price discrimination: Evidence from the U.S. residential mortgage market," International Journal of Industrial Organization, Elsevier, vol. 70(C).
    2. Akgündüz, Yusuf Emre & Dursun-de Neef, H. Özlem & Hacihasanoğlu, Yavuz Selim & Yılmaz, Fatih, 2023. "Cost of credit, mortgage demand and house prices," Journal of Banking & Finance, Elsevier, vol. 154(C).
    3. Neil Bhutta & Daniel R. Ringo, 2017. "The Effect of Interest Rates on Home Buying : Evidence from a Discontinuity in Mortgage Insurance Premiums," Finance and Economics Discussion Series 2017-086, Board of Governors of the Federal Reserve System (U.S.).
    4. Michael Carlos Best & James S Cloyne & Ethan Ilzetzki & Henrik J Kleven, 2020. "Estimating the Elasticity of Intertemporal Substitution Using Mortgage Notches," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 87(2), pages 656-690.
    5. Marx, Benjamin M., 2018. "Dynamic Bunching Estimation with Panel Data," MPRA Paper 88647, University Library of Munich, Germany.
    6. Hanson, Andrew, 2020. "Taxes and Borrower Behavior: Evidence from the Mortgage Interest Deductibility Limit," Journal of Urban Economics, Elsevier, vol. 118(C).
    7. Philippe Aghion & Ufuk Akcigit & Matthieu Lequien & Stefanie Stantcheva, 2017. "Tax Simplicity and Heterogeneous Learning," NBER Working Papers 24049, National Bureau of Economic Research, Inc.
    8. Alexander Gelber & Timothy J. Moore & Alexander Strand, 2017. "The Effect of Disability Insurance Payments on Beneficiaries' Earnings," American Economic Journal: Economic Policy, American Economic Association, vol. 9(3), pages 229-261, August.
    9. Birru, Justin & Chague, Fernando & De-Losso, Rodrigo & Giovannetti, Bruno, 2019. "Attention and Biases: Evidence from Tax-Inattentive Investors," Working Paper Series 2019-22, Ohio State University, Charles A. Dice Center for Research in Financial Economics.
    10. Einav, Liran & Finkelstein, Amy & Schrimpf, Paul, 2017. "Bunching at the kink: Implications for spending responses to health insurance contracts," Journal of Public Economics, Elsevier, vol. 146(C), pages 27-40.
    11. Einav, Liran & Finkelstein, Amy & Schrimpf, Paul, 2019. "Reprint of: Bunching at the kink: Implications for spending responses to health insurance contracts," Journal of Public Economics, Elsevier, vol. 171(C), pages 117-130.
    12. Collins, J. Michael & Hembre, Erik & Urban, Carly, 2020. "Exploring the rise of mortgage borrowing among older Americans," Regional Science and Urban Economics, Elsevier, vol. 83(C).
    13. Karlan, Dean S. & Zinman, Jonathan, 2005. "Elasticities of Demand for Consumer Credit," Center Discussion Papers 28485, Yale University, Economic Growth Center.
    14. Søgaard, Jakob Egholt, 2019. "Labor supply and optimization frictions: Evidence from the Danish student labor market," Journal of Public Economics, Elsevier, vol. 173(C), pages 125-138.
    15. Bertanha, Marinho & McCallum, Andrew H. & Seegert, Nathan, 2023. "Better bunching, nicer notching," Journal of Econometrics, Elsevier, vol. 237(2).
    16. Marinho Bertanha & Andrew H. McCallum & Alexis Payne & Nathan Seegert, 2022. "Bunching estimation of elasticities using Stata," Stata Journal, StataCorp LP, vol. 22(3), pages 597-624, September.
    17. Zhao, Yunhui, 2016. "Got Hurt for What You Paid? Revisiting Government Subsidy in the U.S. Mortgage Market," MPRA Paper 81083, University Library of Munich, Germany, revised 01 Aug 2017.
    18. Philippe Ruh & Stefan Staubli, 2019. "Financial Incentives and Earnings of Disability Insurance Recipients: Evidence from a Notch Design," American Economic Journal: Economic Policy, American Economic Association, vol. 11(2), pages 269-300, May.
    19. Zaresani, Arezou, 2020. "Adjustment cost and incentives to work: Evidence from a disability insurance program," Journal of Public Economics, Elsevier, vol. 188(C).
    20. Jonathan Gruber & Amalie Jensen & Henrik Kleven, 2017. "Do People Respond to the Mortage Interest Deduction? Quasi-Experimental Evidence from Denmark," NBER Working Papers 23600, National Bureau of Economic Research, Inc.

    More about this item

    JEL classification:

    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • R21 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - Housing Demand
    • R31 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - Housing Supply and Markets

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:aea:aejpol:v:9:y:2017:i:1:p:210-40. See general information about how to correct material in RePEc.

    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 CitEc recognized a bibliographic reference but did not link an item in RePEc 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 RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Michael P. Albert (email available below). General contact details of provider: https://edirc.repec.org/data/aeaaaea.html .

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

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.