Fixed Mortgage Rate Research Articles

Interest rates and real estate prices: a panel study

This study examines the connection between interest rates and real estate prices in Switzerland. In considering median prices of six real estate groups consisting of rental apartments, owner-occupied flats, houses, office space, industrial real estate and sales area between the first quarter of 2005 and the fourth quarter of 2018 across 106 Swiss regions, we studied their connection with four interest rate proxies: yields on governmental bonds with 10-year maturity, fixed mortgage rates with 10-year maturity, variable mortgage rates and a newly introduced variable indicating the spread between net initial returns and yields on governmental bonds. Not only do our results show how real estate groups react to specific interest rate representatives, but also how this effect varies between Swiss regions.

A stochastic approach to model housing markets: The US housing market case

This study aims to estimate the price changes in housing markets using a stochastic process, which is defined in the form of stochastic differential equations (SDEs). It proposes a general SDEs system on the price structure in terms of house price index and mortgage rate to establish an effective process. As an empirical analysis, it applies a calibration procedure to an SDE on monthly S&P/Case-Shiller US National Home Price Index (HPI) and 30-year fixed mortgage rate to estimate parameters of differentiable functions defined in SDEs. The prediction power of the proposed stochastic model is justified through a Monte Carlo algorithm for one-year ahead monthly forecasts of the HPI returns. The results of the study show that the stochastic processes are flexible in terms of the choice of structure, compact with respect to the number of exogenous variables involved, and it is a literal method. Furthermore, this approach has a relatively high estimation power in forecasting the national house prices.

A Model of Mortgage Default

ABSTRACTIn this paper, we solve a dynamic model of households' mortgage decisions incorporating labor income, house price, inflation, and interest rate risk. Using a zero‐profit condition for mortgage lenders, we solve for equilibrium mortgage rates given borrower characteristics and optimal decisions. The model quantifies the effects of adjustable versus fixed mortgage rates, loan‐to‐value ratios, and mortgage affordability measures on mortgage premia and default. Mortgage selection by heterogeneous borrowers helps explain the higher default rates on adjustable‐rate mortgages during the recent U.S. housing downturn, and the variation in mortgage premia with the level of interest rates.

Bank integration and co-movements across housing markets

This paper investigates whether bank integration measured by cross-border bank flows can capture the co-movements across housing markets in developed countries by using a spatial dynamic panel model. The transmission can occur through a global banking channel in which global banks intermediate wholesale funding to local banks. Changes in financial conditions are passed across borders through the banks’ balance-sheet exposure to credit, currency, maturity, and funding risks resulting in house price spillovers. While controlling for country-level and global factors, we find significant co-movement across housing markets of countries with proportionally high bank integration. Bank integration can better capture house price co-movements than other measures of economic integration. Once we account for bank exposure, other spatial linkages traditionally used to account for return co-movements across region – such as trade, foreign direct investment, portfolio investment, geographic proximity, etc. – become insignificant. Moreover, we find that the co-movement across housing markets decreases for countries with less developed mortgage markets characterized by fixed mortgage rate contracts, low limits of loan-to-value ratios and no mortgage equity withdrawal.

Mortgage rate and choice of mortgage length: A quasi-experimental evidence from Chinese transaction-level data

Utilizing a large transaction-level dataset on housing mortgages in China, this study estimates the effect of the mortgage rate spread between long- and short-term loans on property purchasers’ choice of loan length. To identify the effect of this spread on loan length, we rely on a unique institutional feature in China—the “dual-track” mortgage scheme. We observe two types of mortgagors in this setting: “normal” mortgagors, who face floating mortgage-rate spreads, and “special mortgagors,” who are entitled to a fixed mortgage rate spread. Using the latter as a comparison group to address the confounding effects of omitted factors, we find that the change in interest rates significantly affects the mortgage decisions of normal mortgagors. When the prime mortgage rate spread increases by ten basis points, the likelihood of such a mortgagor choosing a short-term loan increases by 8.4 percent.

The 2007 financial crisis and the UK residential housing market: Did the relationship between interest rates and house prices change?

This paper investigates the impact of the 2007 financial crisis on the relationship between real mortgage interest rates and real house prices. It applies a dynamic conditional correlation based methodology that uses fractionally differenced data along with controls for structural breaks and non-interest-rate related factors that influence house prices. The key finding made is that the financial crisis had a long-term structural impact on the monetary transmission relationship. For example, we find that the mean conditional correlation between house prices in England and Wales and the three-year fixed mortgage rate rose by 6.6 percentage points. Similarly, the mean correlation between prices and the standard variable mortgage rate increased 6.4 percentage points to 54%. These findings suggest to us that interest-rate-based monetary policy still has an important role to play in the housing market.

U.S. Monetary Policy Surprises and Mortgage Rates

This article examines how the U.S. monetary policy surprises impact the mortgage rates in the nation and across five regions from 1990 to 2008. Regression analysis based on bootstrapping shows that surprises in the target federal funds rate (the target factor) have a significantly positive impact on the 1‐year adjustable‐rate mortgage (ARM) rate within the week of the Federal Open Market Committee announcements and the positive impact lasts up to 1 week after the announcements. Surprises in the future direction of the Federal Reserve monetary policy (the path factor) have significantly positive impacts on both the 1‐year ARM rate and the 30‐year fixed mortgage rates in the first week after the announcement. Furthermore, the responses of mortgage rates are asymmetric and affected by the size of monetary policy surprises, the stage of the business cycle and whether the monetary policy is tightening or loosening. There also exists heterogeneity in the mortgage rate pass‐through process across regions and monetary policy surprises have differential impacts on the regional mortgage rates. The cross‐region variations are mainly correlated with the regional housing market conditions, such as home vacancy and rental vacancy rates.

U.S. Monetary Policy Surprises and Mortgage Rates

This paper examines the magnitude and persistence of the mortgage rate pass-through in response to U.S. monetary policy surprises. The policy surprises are measured by both the surprise changes to the target federal funds rate (the target factor) and surprises in the future direction of the Federal Reserve monetary policy (the path factor). We find that within the week of the FOMC announcements, both the target and path factors have significantly positive impacts on the 1-year ARM rates. In addition, the impact of the target factor on the 1-year ARM rates lasts up to one week after the announcement. We also find that the target factor has a one-week lagged impact on the 30-year fixed mortgage rate. Thus, short-term adjustable mortgage rates experience higher degree of pass-through and faster adjustment speed than long-term fixed mortgage rates. Furthermore, there exist the asymmetric adjustments of U.S. mortgage rates, and the pass through of mortgage rates in responses to monetary policy surprises are affected by the size of monetary policy surprises, the direction of business cycle and whether monetary policy is tightening or loosening. We also find that there exists heterogeneity in the mortgage rate pass-through process across regions. The cross-region variation in the response to the target factor is correlated with growth in income and the unemployment rate in the region, while the cross-region variation in the response to the path factor is mainly related to the housing market factors, such as the rental vacancy rate.

Econometric analysis of interest rate pass-through

The econometric analysis of interest rate pass-through is examined. It is noted a number of recent studies have employed a procedure that underestimates the extent of interest rate pass-through. This issue is highlighted via an analysis of pass-through from the U.S. Federal Funds rate to the U.S. 30-year fixed mortgage rate. In contrast to work of Payne (2006), which draws an inference of incomplete interest rate pass-through, the adoption of an unbiased method leads to the conflicting conclusion that it is complete. The importance of adopting an unbiased method is noted given the central role of interest rate pass-through in the effectiveness and transmission of monetary policy.

Fed Funds Rate and Interest Rate Elasticities

The federal funds rate is an important, short-term interest rate which is targeted by the Federal Reserve to influence economic growth and inflation. The financial markets closely monitor the Federal Reserve's monetary policy and changes in the federal funds rate to gauge future economic performance. This research analyzes how changes in the federal funds rate affected the 1) yield curve, 2) 30-year fixed mortgage rate, and 3) spread between Aaa and Baa corporate bond yields. The purpose is to determine the rippling effect between changes in the federal funds rate and changes in interest rates that affect the cost of borrowing by firms, individuals, and the government. The empirical results indicate that when a basis point change of 25 points or more occurs to the fed funds rate, which is of a magnitude consistent with a change in Federal Reserve policy, a statistically significant, positively related change occurs in the one-month interest rate elasticities for the 3-Month Treasury rate, 1-Year Treasury rate, 5-Year Treasury rate, 10-Year Treasury rate, and the 30-Year Mortgage rate.

Monetary policy transparency and pass-through of retail interest rates

This paper examines the degree of pass-through and adjustment speed of retail interest rates in response to changes in benchmark market rates in New Zealand during the period 1994–2004. We consider the effects of policy transparency and financial structure of the monetary transmission mechanism. New Zealand is the first OECD country to adopt a full-fledged inflation targeting regime with specific accountability and transparency provisions. Policy transparency was further enhanced by a shift from quantity (settlement cash) to price (interest rate) operating targets in 1999. Using Phillips–Loretan estimates of cointegrating regressions we find complete long-term pass-through for some but not all retail rates. Our results also show that the introduction of the Official Cash Rate (OCR) increased the pass-through of floating and deposit rates but not fixed mortgage rates. In line with previous studies we find the immediate pass-through of market interest rates to bank retail rates to be incomplete. Although we find no statistical evidence for asymmetric response of retail rates to changes in market rates other than for business lending rates in the pre OCR period, differences in the magnitude of mean adjustment lags indicate that banks appear to pass on decreases to fixed mortgage rates faster. Overall, our results confirm that monetary policy rate has more influence on short-term interest rates and that increased transparency has lowered instrument volatility and enhanced the efficacy of policy.

Monetary Policy Transparency and Pass-Through of Retail Interest Rates

This paper examines the degree of pass-through and adjustment speed of retail interest rates in response to changes in benchmark market rates in New Zealand during the period 1994 to 2004. We consider the effects of policy transparency and financial structure of the monetary transmission mechanism. New Zealand is the first OECD country to adopt a full-fledged inflation targeting regime with specific accountability and transparency provisions. Policy transparency was further enhanced by a shift from quantity (settlement cash) to price (interest rate) operating targets in 1999. We find complete long-term pass-through for some but not all retail rates. Our results also show that the introduction of the Official Cash Rate (OCR) increased the pass-through of floating and deposit rates but not fixed mortgage rates. In line with previous studies we find the immediate pass-through of market interest rates to bank retail rates to be incomplete. We find no evidence for asymmetric response of retail rates to changes in market rates other than for business lending rates in the pre OCR period. Overall, our results confirm that monetary policy rate has more influence on short-term interest rates and that increased transparency has lowered instrument volatility and enhanced the efficacy of policy.

Strategic Treasury Debt Management in Public Policy

The Treasury should supplement its bond offerings with adjustable‐rate coupon bonds. The adjustable coupon would be linked to the six‐month Treasury bill auction yield. Given the different magnitude of adjustable and fixed mortgage rates, the interest servicing costs would be dramatically lower for the floating‐coupon bonds. This idea is already a proven winner in the corporate bond market where close to 30 percent of new Eurobond offerings in the last 10 years have been adjustable‐rate bonds. In addition to reducing servicing costs, the strategy will relieve some of the burden on the long‐maturity fixed‐coupon bonds. Reducing the supply of the fixed‐coupon bonds should increase prices and decrease long‐term yields. Reduction in long‐term interest rates enhances spending, construction and capital expenditures. Most importantly, these bonds help enforce a low inflation policy.