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Innovations in mortgage markets and increased spending on housing

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  • Mark Doms
  • John Krainer

Abstract

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.

Suggested Citation

  • Mark Doms & John Krainer, 2007. "Innovations in mortgage markets and increased spending on housing," Working Paper Series 2007-05, Federal Reserve Bank of San Francisco.
  • Handle: RePEc:fip:fedfwp:2007-05
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    Cited by:

    1. repec:eee:jhecon:v:53:y:2017:i:c:p:38-52 is not listed on IDEAS
    2. Ebrahim, M. Shahid & Shackleton, Mark B. & Wojakowski, Rafal M., 2011. "Participating mortgages and the efficiency of financial intermediation," Journal of Banking & Finance, Elsevier, vol. 35(11), pages 3042-3054, November.
    3. Olga Gorbachev & Keshav Dogra, 2009. "Evolution of Consumption Volatility for the Liquidity Constrained Households over 1983 to 2004," ESE Discussion Papers 193, Edinburgh School of Economics, University of Edinburgh.
    4. John V. Duca & John N. Muellbauer & Anthony Murphy, 2011. "Shifting credit standards and the boom and bust in U.S. house prices," Working Papers 1104, Federal Reserve Bank of Dallas.
    5. John V. Duca & John Muellbauer & Anthony Murphy, 2011. "House Prices and Credit Constraints: Making Sense of the US Experience," Economic Journal, Royal Economic Society, vol. 121(552), pages 533-551, May.
    6. Sophocles Brissimis & Thomas Vlassopoulos, 2009. "The Interaction between Mortgage Financing and Housing Prices in Greece," The Journal of Real Estate Finance and Economics, Springer, vol. 39(2), pages 146-164, August.
    7. John Krainer, 2006. "Mortgage innovation and consumer choice," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue dec29.
    8. repec:eee:quaeco:v:64:y:2017:i:c:p:171-182 is not listed on IDEAS
    9. Michelle J. White, 2008. "Bankruptcy: Past Puzzles, Recent Reforms, and the Mortgage Crisis," NBER Working Papers 14549, National Bureau of Economic Research, Inc.
    10. Gete, Pedro, 2009. "Housing Markets and Current Account Dynamics," MPRA Paper 20957, University Library of Munich, Germany, revised 24 Feb 2010.
    11. Frederick T. Furlong & Yelena Takhtamanova, 2012. "Did the housing boom affect mortgage choices?," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue nov5.

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    Keywords

    Mortgages ; Housing - Finance;

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