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Mortgage timing

  • Koijen, Ralph S.J.
  • Hemert, Otto Van
  • Nieuwerburgh, Stijn Van

We study how the term structure of interest rates relates to mortgage choice at both household and aggregate levels. A simple utility framework of mortgage choice points to the long-term bond risk premium as distinct from the yield spread and the long yield as a theoretical determinant of mortgage choice: when the bond risk premium is high, fixed-rate mortgage payments are high, making adjustable-rate mortgages more attractive. We confirm empirically that the bulk of the time variation in both aggregate and loan-level mortgage choice can be explained by time variation in the bond risk premium, whether bond risk premia are measured using forecasters' data, a vector autoregressive (VAR) term structure model, or a simple household decision rule based on adaptive expectations. The household decision rule moves in lock-step with mortgage choice, lending credibility to a theory of strategic mortgage timing by households.

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Article provided by Elsevier in its journal Journal of Financial Economics.

Volume (Year): 93 (2009)
Issue (Month): 2 (August)
Pages: 292-324

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Handle: RePEc:eee:jfinec:v:93:y:2009:i:2:p:292-324
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505576

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