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Accelerating Inflation, Nonassumable Fixed-Rate Mortgages, and Consumer Choice and Welfare

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  • Patric H. Hendershott
  • Sheng Cheng Hu

Abstract

This paper measures the impact of nonassumable, fixed-rate, long-term mortgage financing on household mobility and housing demand during a period of accelerating inflation (l965_71l). We calculate that typical households who bought houses during the l96l7l period and utilized this type of financing would not have moved until the 1975-77 period. And this is in spite of rising incomes and a sharp fail in the real rental price or user cost of housing. We conclude that the nonassumable, fixed-rate mortgage is largely responsible for bath sluggish housing demand in the l967-79 period and its surge in the 1976-79 period. Housing activity would have been far more stable had variable-rate mortgagee been employed. Finally, the enormous gap between current mortgage rates and those existing in the19705 and the resultant huge capital gains on existing mortgages does not bode well for housing activity in the near term future.

Suggested Citation

  • Patric H. Hendershott & Sheng Cheng Hu, 1981. "Accelerating Inflation, Nonassumable Fixed-Rate Mortgages, and Consumer Choice and Welfare," NBER Working Papers 0755, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:0755
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    1. Patric H. Hendershott & Kevin E. Villani, 1981. "The Terminations Premium in Mortgage Coupon Rates: Evidence on the Integration of Mortgage and Bond Markets," NBER Working Papers 0738, National Bureau of Economic Research, Inc.
    2. Kearl, J R, 1979. "Inflation, Mortgages, and Housing," Journal of Political Economy, University of Chicago Press, vol. 87(5), pages 1115-1138, October.
    3. Jaffee, Dwight M & Rosen, Kenneth T, 1978. "Estimates of the Effectiveness of Stabilization Policies for the Mortgage and Housing Markets," Journal of Finance, American Finance Association, vol. 33(3), pages 933-946, June.
    4. Rosen, Harvey S., 1979. "Housing decisions and the U.S. income tax : An econometric analysis," Journal of Public Economics, Elsevier, vol. 11(1), pages 1-23, February.
    5. 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.
    6. Hendershott, Patric H. & Cheng Hu, Sheng, 1981. "Inflation and extraordinary returns on owner-occupied housing: Some implications for capital allocation and productivity growth," Journal of Macroeconomics, Elsevier, vol. 3(2), pages 177-203.
    7. Hendershott, Patric H & Hu, Sheng Cheng, 1983. "The Allocation of Capital between Residential and Nonresidential Uses: Taxes, Inflation and Capital Market Constraints," Journal of Finance, American Finance Association, vol. 38(3), pages 795-812, June.
    8. Kearl, J R, 1978. "Inflation and Relative Price Distortions: The Case of Housing," The Review of Economics and Statistics, MIT Press, vol. 60(4), pages 609-614, November.
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