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Innovations in mortgage markets and increased spending on housing

  • Mark Doms
  • John Krainer

Over the past several decades, innovations in the mortgage market have benefited consumers through a variety of channels. Innovations include the lowering of down payment requirements, increased flexibility in repayment schedules, and the reduction of costs associated with extracting equity from homes. To ascertain the ways in which these innovations would alter spending on housing, we develop a model of the home buying and mortgage choice decision that produces a number of testable implications. For instance, the lowering of down payment requirements should result in homeownership rates increasing, especially for households that are traditionally cash constrained. In fact, we show that between 1994 and 2004, the homeownership rate for young and low-income households rose sharply. Increased flexibility of repayment schedules should assist households in smoothing their housing consumption choices. Empirically, we document that households have increased the share of their income spent on housing by a substantial margin. The result is robust to the changing composition of households and also to regional location. Households that have been traditionally cash constrained have increased their housing expenditures but tend to have low mortgage rates, suggesting that these households may be financing their increased housing consumption with alternative, flexible mortgage products.

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Paper provided by Federal Reserve Bank of San Francisco in its series Working Paper Series with number 2007-05.

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Date of creation: 2007
Date of revision:
Handle: RePEc:fip:fedfwp:2007-05
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  1. Richard K. Green & Susan M. Wachter, 2005. "The American Mortgage in Historical and International Context," Journal of Economic Perspectives, American Economic Association, vol. 19(4), pages 93-114, Fall.
  2. Bostic, Raphael W & Surette, Brian J, 2001. "Have the Doors Opened Wider? Trends in Homeownership Rates by Race and Income," The Journal of Real Estate Finance and Economics, Springer, vol. 23(3), pages 411-34, November.
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  7. John Y. Campbell, 2006. "Household Finance," NBER Working Papers 12149, National Bureau of Economic Research, Inc.
  8. Alm, James & Follain, James R., 1984. "Alternative Mortgage Instruments, the Tilt Problem, and Consumer Welfare," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 19(01), pages 113-126, March.
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  10. Yamashita, Takashi, 2003. "Owner-occupied housing and investment in stocks: an empirical test," Journal of Urban Economics, Elsevier, vol. 53(2), pages 220-237, March.
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  12. Hurst, Erik & Stafford, Frank, 2004. "Home Is Where the Equity Is: Mortgage Refinancing and Household Consumption," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 36(6), pages 985-1014, December.
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  15. Rui Yao, 2005. "Optimal Consumption and Portfolio Choices with Risky Housing and Borrowing Constraints," Review of Financial Studies, Society for Financial Studies, vol. 18(1), pages 197-239.
  16. Jeffrey R. Campbell & Zvi Hercowitz, 2006. "The macroeconomic transition to high household debt," Proceedings, Federal Reserve Bank of San Francisco, issue Nov.
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