Mortgage Interest Rates Research Articles

How Mortgage Interest Rates and Salaries Affect the Mortgage Debt

This paper explores the relationship between household mortgage debt and mortgage interest rate and salary in Bulgaria. The monthly data in this research paper is from January 2007 to June 2020, from existing official sources - NSI (National Statistical Institute) and BNB (Bulgarian National Bank). The chosen initial period is related to the beginning of the Monetary Board and the macroeconomic stability of the country after the Board. The research methodology includes correlation, regression analysis and related tests of statistical hypotheses. Based on the results, we derive the estimated regression equation that can be used to explain the impact of changes in independent variables on the dependent variable and to make predictions. We found that mortgage debt is positively associated with salary and negatively associated with mortgage interest rate.

Borrowing Constraints, Own Labour and Homeownership: Does it Pay to Paint Your Walls?

Using a dedicated set of questions in the 2014 Luxembourg Household Finance and Consumption Survey (LU-HFCS), we show that a substantial share of households contributes their own labour to the acquisition of their main residence. These contributions help households faced with credit constraints, since they reduce the need for external financing. We develop a simple theoretical model and show that own labour contributions decrease with the level of financial resources available, while they increase with the mortgage interest rate. These theoretical results are supported by empirical analysis, which also shows that own labour contributions vary by household characteristics (age, gender, profession) and by type of dwelling (house, apartment). JEL Classification: D14, E43, G21, R21

Climate Change Risk and the Costs of Mortgage Credit

We show that lenders charge higher interest rates for mortgages on properties exposed to a greater risk of sea level rise (SLR). This SLR premium is not evident in short-term loans and is not related to borrowers’ short-term realized default or creditworthiness. Further, the SLR premium is smaller when the consequences of climate change are less salient and in areas with more climate change deniers. Overall, our results suggest that mortgage lenders view the risk of SLR as a long-term risk, and that attention and beliefs are potential channels through which SLR risk is priced in residential mortgage markets.

US Housing Market During COVID-19: Aggregate and Distributional Evidence

Using zip code-level data and nonparametric estimation, I present eight stylized facts on the US housing market in the COVID-19 era. Some aggregate results are: (1) growth rate of median housing price during the four months (April-August 2020) since the Federal Reserve's unprecedented monetary easing has accelerated faster than any four-month period in the lead-up to the 2007-09 global financial crisis; (2) the increase in housing demand in response to lower mortgage interest rates displays a structural break since March 2020 (housing demand has increased by much more than before). These results indicate either the existence of 'fear of missing out' or COVID-induced fundamental changes in household behavior. In terms of distributional evidence, I find that the increase of housing demand seems more pronounced among the two ends of the income distribution, possibly reflecting relaxed liquidity constraints at the lower end and speculative demand at the higher end. I also find that the developments in housing price, demand, and supply since April 2020 are similar across urban, suburban, and rural areas. The paper highlights some potential unintended consequences of COVID-fighting policies and calls for further studies of the driving forces of the empirical findings.

To Change or Not to Change: The Impact of the Law on Mortgage Origination

Differences in mortgage law have significant effects on loan characteristics at origination. Borrower-friendly laws impose higher costs and risks for lenders and, thus, induce effects on mortgage pricing and leverage. However, not all borrower-friendly laws have the same effects. This finding is established using loan-level data for the U.S. mortgage market between 2001 and 2011. Judicial foreclosure requirements imply higher mortgage interest rates due to higher recovery costs and activate the price channel. Recourse restrictions imply higher loan collateralization to compensate for the fewer recovery opportunities and activate the collateral channel.

Monetary Policy and Birth Rates: The Effect of Mortgage Rate Pass-Through on Fertility

This paper examines whether monetary policy pass-through to mortgage interest rates affects household fertility decisions. Using administrative data on mortgages and births in the UK, our empirical strategy exploits variation in the timing of when families were eligible for a rate adjustment, coupled with the large reductions in the monetary policy rate that occurred during the Great Recession. We estimate that each 1 percentage point drop in the policy rate increased birth rates by 2 percent. In aggregate, this pass-through of accommodative monetary policy to mortgage rates was sufficiently large to outweigh the headwinds of the Great Recession and prevent a “baby bust” in the UK, in contrast to the US. Our results provide new evidence on the nature of monetary policy transmission to households and suggest a new mechanism via which mortgage contract structures can affect both aggregate demand and supply.

How Quantitative Easing Works: Evidence on the Refinancing Channel

AbstractWe document the transmission of large-scale asset purchases by the Federal Reserve to the real economy using rich borrower-linked mortgage-market data and an identification strategy based on mortgage market segmentation. We find that central bank QE1 MBS purchases substantially increased refinancing activity, reduced interest payments for refinancing households, led to a boom in equity extraction, and increased aggregate consumption. Relative to QE-ineligible jumbo mortgages, QE-eligible conforming mortgage interest rates fell by an additional 40 bp and refinancing volumes increased by an additional 56% during QE1. We estimate that households refinancing during QE1 increased their durable consumption by 12%. Our results highlight that the transmission of unconventional monetary policy to the real economy depends crucially on the composition of assets purchased and the degree of segmentation in the market.

HUBUNGAN INDEKS HARGA PROPERTI RESIDENSIAL DAN KREDIT PERBANKAN

Demand and supply in housing market depends on macroeconomic conditions such as Gross Domestic Product, interest rates, and housing prices. Changes to these variables are related to changes in housing market. This study aims to examine the relationship of housing prices, Gross Domestic Product, mortgage interest rate to Banking Credit. Knowing the relationship will be useful in making strategic decisions related to property investment and portfolio management. Housing price using Residential Price Index in primary market will be grouped into three parts based on land area of residential property consist of small house type, medium house type, and big house type. Data processing using Auto Regressive Distribution Lag (ARDL) bound test model to test the relationship between variables. The result of the research shows that there is a significant long run cointegration on the variable of housing price, Gross Domestic Product, and mortgage interest to banking credit. Furthermore, in testing each housing price group, the test results also show the relationship between these variables.

Impact of macroeconomic indicators on housing prices

PurposeThis paper uses statistical analyses to quantify the effects of five major macroeconomic indicators, namely crude oil price, 30-year mortgage interest rate (IR), Consumer Price Index (CPI), Dow Jones Industrial Average (DJIA), and unemployment rate (UR), on housing prices over time.Design/methodology/approachHousing price is measured as housing price index (HPI) and is treated as a variable affecting itself. Actual housing sale prices in the Town of Amherst, New York State, USA, 1999-2008, and time-series data of the macroeconomic indicators, 2000-2017, were used in a vector autoregression statistical model to examine the data that show the greatest statistical significance and exert maximum quantitative effects of macroeconomic indicators on housing prices.FindingsThe analyses concluded that the 30-year IR and HPI have statistically significant effects on housing prices. IR has the highest effect, contributing 5.0 per cent of variance in the first month to 8.5 per cent in the twelfth. The UR has the next greatest influence followed by DJIA and CPI. The disturbance from HPI itself causes the greatest variability in future prices: up to 92.7 per cent in variance 1 month ahead and approximately 74.5 per cent 12 months ahead. This result indicates that current changes in house prices heavily influence people’s expectation of future prices. The total effect of the error variance of the macroeconomic indicators ranged from 7.3 per cent in the first month to 25.5 per cent in the twelfth.Originality/valueThe conclusions in this paper, along with related tables and figures, will be useful to the housing and real estate communities in planning their business for the next years.

거시경제변수와 주택보유기간 결정요인에 관한 연구*

This study designates household annual income, total assets, debt-to-asset ratio, price per pyeong, household head age, consumer price index, housing construction completion, mortgage interest rate, and housing purchase price index as independent variables for the purpose of analyzing the determinants of housing retention period, a dependent variable. Given the inputs of time-varying macroeconomic variables, Weibull distribution is used for survival analysis. The subjects of analysis are restricted to ‘owner-occupancy,’ which is divided into single-home owners and second-home owners. The analysis showed that increase in household annual income and total assets increased the probability for selling home among single-home owners, thus reducing the housing retention period. In contrast, as for second-home owners, it was found that increase in debt-to-asset ratio raised the housing selling risk rate. In addition, analysis showed that all the input macroeconomic variables had significant effects on housing retention period. The empirical analysis show that real estate regulations and policies should be operated flexibly according to market conditions so that housing can be supplied smoothly to the market, thereby increasing housing demand.

Estimating the Elasticity of Intertemporal Substitution Using Mortgage Notches

Using a novel source of quasi-experimental variation in interest rates, we develop a new approach to estimating the Elasticity of Intertemporal Substitution (EIS). In the UK, the mortgage interest rate features discrete jumps -- notches -- at thresholds for the loan-to-value (LTV) ratio. These notches generate large bunching below the critical LTV thresholds and missing mass above them. We develop a dynamic model that links these empirical moments to the underlying structural EIS. The average EIS is small, around 0.1, and quite homogeneous in the population. This finding is robust to structural assumptions and can allow for uncertainty, a wide range of risk preferences, portfolio reallocation, liquidity constraints, present bias, and optimization frictions. Our findings have implications for the numerous calibration studies that rely on larger values of the EIS.

Asymmetric responses of house prices to changes in the mortgage interest rate: evidence from the Australian capital cities

ABSTRACTWe examine the dynamic and asymmetric responses of house prices to changes in mortgage interest rates in Australia from January 1995 to November 2017. We propose a threshold intervention model to distinguish between the effects of positive versus negative changes in the standard variable interest rate. The results indicate that rising interest rates decrease house prices more than falling interest rates increase them. For example, a 1% decrease in interest rates increases Sydney’s house prices by 0.7%, whereas a 1% increase leads to a 1.5% fall. The findings also support the view that when interest rates are on the rise, house prices in larger capital cities such as Sydney and Melbourne fall faster than in their smaller counterparts. Our findings imply that a rise in interest rates may thus lead to sharp, fast and significant falls in house prices, a phenomenon which will not simply be a symmetric unwinding of earlier price increases.

Are Home Buyers Inattentive? Evidence from Capitalization of Energy Costs

This paper explores whether home buyers are attentive to energy costs. The cost-effectiveness of market-based pollution policies crucially depends on whether consumers are attentive to energy costs when purchasing energy-using durables. I exploit energy-cost variation from fuel-price changes in Massachusetts where there is significant overlap in the geographic and age distributions of oil-heated and gas-heated homes. The results strongly reject that home buyers are unresponsive to energy costs under a wide range of consumption and discount-rate assumptions. Furthermore, my preferred specification is consistent with full capitalization of fuel expenditures at discount rates similar to mortgage interest rates. (JEL D14, L71, Q41, Q53, Q58, R31)

Evaluating Borrower's Net Yield in Long-Term Fixed Rate Mortgage Loans in Korea

The Korean government has tried to change the structure of residential mortgages in Korea from the short-term variable-rate non-amorting loans to the long-term fixed-rate amorting loans since the early 2000’s. This study examines he borrower’s net yield from that new type of loans, which is defined as the difference between the lender’s yield out of the borrower’s repayment and the borrower’s yield from the expected gain on the portion of housing equity funded by cosnumer. The main hypothesis tested is that the borrower’s net yield will be affected by the time of loan origination and the level of mortgage interest rate charged because the future fluctuations of housing values and that of market interest rates are expected to be key determinants. The results confirm the hypothesis in that borrower’s net yields show positive or negative values according to the time of loan start, the level of fixed loan rates, or home regions. The results documented can offer a useful information as to the financial consumers’decision on loan amount and the timing of loan application considering the housing and mortgage market condition, which in turn can provide policy implication to regulating the maximum loan-to-value (LTV) ratio regulations.

Mortgage Selection: Interactive Effects of House Price Appreciation and Mortgage Pricing Components

Research has shown evidence of a link between house price appreciation and the selection of mortgage financing options: Higher appreciation is associated with higher take-up rates for adjustable-rate mortgages relative to fixed-rate mortgages. Research also finds that mortgage interest rates and their underlying components are important determinants of take-up rates among mortgage financing options. In this paper we show that house price appreciation can have important interactive effects with those other determinants of mortgage financing outcomes. We focus on the period from 2000 to 2007, an episode marked by rapid house price appreciation along with a persistent and notable increase in the use of adjustable-rate mortgage financing, including alternative mortgage products. Empirical analysis indicates that higher house price appreciation dampened the estimated effect of the mortgage pricing components on the probabilities of mortgage financing outcomes. The results, which are especially robust for fixed-rate and adjustable-rate mortgages that are fully amortized, are not driven solely by markets with especially high rates of house price appreciation. Moreover, after taking into account the interactive effects with mortgage pricing components, house price appreciation has relatively little additional effect on take-up rates among mortgage financing options.

The dynamics of house prices and fiscal policy shocks in Turkey

This study examines the interaction between house prices and gov-ernment spending, mortgage interest rates, and gross domestic product in Turkey. The ARDL bounds test approach is applied to quarterly data covering the 2010:1–2017:4 period. Findings indicate that there is a statistically significant long-run and short-run cointegration between the two house price indexes and government spending, mortgage rates, and GDP. An increase in government spending has a statistically sig-nificant positive effect on house prices. The study also indicates that mortgage interest rate and GDP have a statistically signifi-cant effect on house prices.

Creating a Development Bank to Finance Affordable Housing in South Africa is a Timely Catalyst to Address Demand and Supply Challenges

The twin problems of affordability and accessibility that hamper the progress of housing in our country need to be addressed on a sustainable basis and the state needs to take on the role as a facilitator to create the enabling environment to encourage greater private sector participation. As a consequence, it is quite opportune to establish the Human Settlements Development Bank (HSDB). The mortgage finance affordability challenge is also attributable to key essential drivers, namely; house price index, disposable income, and the mortgage interest rates.

Evidence of Government Subsidy on Mortgage Rate and Default: Revisited

I empirically evaluate the subsidized default insurance policy (implemented through the guarantee for government-sponsored enterprises) in the U.S. mortgage market. First, I find that the subsidy raised mortgage interest rates for loans eligible for the subsidy (conforming loans), which is contrary to conventional wisdom. I do so by applying regression discontinuity designs and using the exogenous variation generated by a mandate of the U.S. Congress. My strategy circumvents the endogeneity problem in conventional studies. Second, using various time-to-default models, I find that the subsidy raised the mortgage default probabilities of all conforming loans. The paper has important policy implications on financial regulation and financial stability: I caution regulators against interpreting the observed jumbo-conforming spread as an indication that the subsidy necessarily lowers mortgage rates and benefits conforming borrowers; highlights the adverse impact of the subsidy on financial stability; and calls for deeper housing finance reforms in the U.S. beyond the Dodd-Frank Wall Street Reform and Consumer Protection Act.

Determinants of credit spreads in hotel CMBS loans

PurposeThis study aims to investigate the determinants of credit spreads in hotel loans securitized into commercial mortgage-backed securities (CMBS) between 2010 and 2015.Design/methodology/approachThe sample represents 1,579 US hotel fixed interest rate whole loans with an aggregate mortgage value of $26.6bn at loan origination. The relationship between credit spreads and property, loan and market characteristic is examined via multiple regression analysis. Additionally, the method of 2-stage least squares is used to control for endogeneity bias and identify the effect of the loan-to-value (LTV) ratio on credit spreads.FindingsThe multiple regression models explain 80 per cent of the variation in credit spreads and show a significant association of credit spreads with hotel and loan characteristics and market conditions. The findings indicate the debt coverage ratio to be the most important predictor of credit spreads followed by the loan maturity term, implied capitalization rate, LTV and yield curve. The results show the debt yield premium to be a stronger predictor of credit spreads than the debt yield ratio. The spread between the debt yield ratio and mortgage interest rate could be used in future research as an instrumental variable to identify the effect of the LTV on credit spreads.Research limitations/implicationsThis study is limited to the CMBS market and the period after the financial crisis. Additional limitations include sample selection bias, exclusion of multi-property loans and variable interest rate loans.Practical implicationsInterest rate increases in an expanding economy would likely increase the cost of borrowing for hotel owners leading to higher debt service payments and lower profitability. If an increase in interest rates is offset by a decline in credit spreads, hotel owners will still benefit from the ensuing stability in borrowing interest rates. The evidence also suggests that CMBS lenders favor select service and extended stay hotels. Owners and operators of these efficient and profitable hotels will likely obtain loans with lower credit spreads given their lower risk of default.Originality/valueThe current study provides evidence on the effects of loan and property characteristics in the pricing of loan risk and serves to inform CMBS market participants about the factors that drive credit spreads in hotel mortgage loans.

International funding cost and heterogeneous mortgage interest-rate pass-through: a bank-level analysis

This study examines the transmission of the cost-of-funds rates, domestically and internationally, to owner-occupied housing interest rates at the bank level for the period 2002(7)–2015(12) in Australia. Three main issues, cross-sectional dependence, parameter heterogeneity, and asymmetry, have been considered using the linear and nonlinear common-factor Augmented Mean Group estimators. Significant unobservable coefficients in all estimates ascertain that unobserved common factors arising from both national and global shocks have a significant influence on mortgage rate transmission. The results of sizable heterogeneity and asymmetry, found in all estimates while controlling for cross-sectional correlations, highlight the substantial effect of the foreign-funds rate on long-run mortgage price setting. We find a closer connection between mortgage interest rates and international funding cost; we have also confirmed a declining transmission of the policy rate after the 2008 global financial crisis.