Mortgage Rates Research Articles

Feature Article: Higher mortgage rates will deepen housing downturn

Feature Article: Higher mortgage rates will deepen housing downturn

Proposal for calculating regulatory capital requirements for reverse mortgages

In the current context in which many people worry about the sustainability of pension systems, reverse mortgages are gaining popularity because they are a way to supplement elderly people's incomes. However, it is necessary to provide banks with an adequate risk measurement and management procedure for reverse mortgages to increase the commercialization of these products, which will result in greater well-being for the retirement age population. In this paper, we propose a method to measure risk and estimate the regulatory capital requirements for a portfolio of reverse mortgages owned by a financial institution according to Basel II and III. The method considers house price risk, mortality risk and interest rate risk; consequently, regulatory capital requirements need to be computed using a Monte Carlo simulation procedure. The proposed method is general and can accommodate several scenarios for reverse mortgage specifications, including fixed or variable mortgage rates and different income stream schemes (with the lump sum as a particular case). The results for the U.K. show that reverse mortgage providers face higher risk when the lender initially advances a higher amount, with the lump-sum case indicating the highest risk, for relatively younger borrowers, the female population, higher interest rates and floating mortgage rates.

The study "Unravelling the Impact: Assessing the Impacts of Rising Rates of Interest and Inflation on Individual Finances"

The impact of rising interest rates and hyperinflation on personal finances is examined in this abstract. It draws attention to how these two economic aspects are interconnected and what it means for people's financial security. This abstract offers insights into how changes in mortgage rates and inflation affect personal finances by looking at the impact on costs of borrowing, deposits, savings, and purchasing power. The link between rate of interest and borrowing costs is the first topic covered in the abstract. When interest rates increase, borrowing money becomes increasingly costly for people, which has an impact on many facets of personal finances like credit card debt, home loans, and auto loans. According to the abstract, increasing borrowing costs can result in bigger debt loads, decreased affordability, and possible difficulties with debt payback. The abstract also looks at how inflation affects people's personal budgets. Over time, inflation reduces the monetary value of money, raising the cost of goods and services. The abstract focuses on how inflationary affects the costs of living, covering necessities like housing, food, and medical care. It emphasizes how crucial it is to factor inflation into long-term financial planning and budgeting in order to preserve financial stability and lessen the loss of wealth. The abstract also discusses how the rate of interest and inflation interact. It illustrates how interest rates are frequently employed by central banks as a tool to manage inflation. By decreasing consumption and slowing economic expansion, an increase in financing costs can help control inflation. However, this additionally has a negative impact on a person's personal finances, especially if they have investments or loans with variable rates or loans that are susceptible to changes in interest rates. The abstract also looks at ways that people might manage the effects of inflation and higher interest rates on their personal budgets. It talks on the value of financial literacy, investment diversification, responsible management of debt, and proactive steps like refinancing or modifying spending patterns to accommodate shifting economic conditions.

Navigating the 2023 US Housing Market: Impact on Residential Mortgage-Backed Securities

This article discusses the outlook for the US housing market and its expected impact on the trading dynamics of residential mortgage-backed securities (RMBS) in 2023. Despite the current reduced affordability of housing due to higher mortgage rates and surging home values, single family home prices are unlikely to experience a sharp decline, with growth expected in the second half of the year. The limited housing supply will lead to increased upward pressure on home prices and stronger performance in RMBS. Non-Qualified Mortgage (non-QM) products may face a challenging year in 2023, with delinquencies and losses expected to rise. Credit performance will be critical, and demand for affordability products is likely to increase. Overall, the outlook for the RMBS market remains challenging due to rising interest rates, tightening monetary policy, and the expected increase in the supply of MBS. However, the high level of home equity in the US housing market will create skin in the game for borrowers as well as higher collateral values to protect against credit deterioration.

How risk-diversification for conservation investment is affected by the real estate market shock triggered by the COVID-19 pandemic

ABSTRACT Real-estate prices have soared since the start of the COVID-19 pandemic amid historically low mortgage rates and limited supply. The external shock observed in the real-estate market through relief measures may trigger changes in optimal conservation portfolios. The objective of this research is to identify the impacts of the real-estate market shock triggered by the pandemic through low-interest rates and limited real-estate supply on risk-diversification strategies for land conservation investment and to understand the implications of these impacts. We use a case study involving biodiversity conservation in the central and southern Appalachian region of the US by comparing modern portfolio theory (MPT) outputs using future conservation cost predictions with and without the shock. We find that the financial burden to fund the same level of risk-diversifying conservation benefits increases due to the shock and increases at an increasing rate as the return on investment (ROI) objective rises. This finding is alarming since higher conservation costs triggered by the shock decrease the cost-effectiveness of risk diversification, and this effect exacerbates with the goal of achieving higher ROI. Spatial diversification strategies with and without the shock offer risk-diversification information to help conservation organizations determine effective investment strategies.

How Do Mortgage Rate Resets Affect Consumer Spending and Debt Repayment? Evidence from Canadian Consumers

AbstractOne of the most important channels through which monetary policy affects the real economy is changes in mortgage rates. This paper studies the effects of mortgage rate changes resulting from monetary policy shifts on homeowners' spending, debt repayment, and defaults. The Canadian institutional setting facilitates the design of identification strategies for causal inference, since the vast majority of mortgages in the country experience predetermined, periodic, and automatic contract renewals with the mortgage rate reset based on the prevailing market rate. This allows us to exploit quasi‐random variation in the timing of the rate reset and to present causal evidence for both rate declines and increases using detailed, representative consumer credit panel data. We find asymmetric effects of rate changes on spending, debt repayment, and defaults. Our results can be rationalized by the conventional cash‐flow effect in conjunction with changes in consumer expectations about future interest rates upon the reset. Given the pervasiveness of Canadian‐type mortgages in many other OECD countries, our findings have broader implications for the transmission of monetary policy to the household sector.

Concentration in the housing construction market in Russia on the example of Moscow and the prospects for further industry consolidation

The Russian residential real estate market has been largely restructured in recent years. In 2019, the transition to the use of escrow accounts began, in 2020 the market faced the coronavirus pandemic, in 2022 the market began to go through another crisis, demonstrating a significant decrease in sales at the end of the year. At the same time, both state support programs and joint actions of banks and developers were the mitigant of the ongoing shocks in the market. For example, the launch of mortgage subsidy programs by industry leaders quickly spread throughout the market — the actions of PIK, Samolet, Level Group to expand these programs to "mortgages at 0.1 %" forced other players to reconsider their pricing policy. However, not all developers are able to quickly adapt to changing market conditions. However, since January 2023, the practice of low mortgage rates has been largely limited by the regulator due to increased systemic risks. In this regard, the residential construction segment is once again facing a major challenge for the industry. Many developers leave the market as single projects are completed because: not everyone can fi nd the required capital; not everyone gets credit lines from banks; not everyone is able to withstand the turbulence in the economy. In this regard, there is a hypothesis that the housing construction market is becoming less and less competitive, and in the next 1–2 years the concentration in the industry will only increase.

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.

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

Abstract This paper examines whether monetary policy pass-through to mortgage interest rates affects household fertility decisions. Our empirical strategy exploits variation in households’ eligibility for a rate adjustment, coupled with the large reductions in the monetary policy rate that occurred during the Great Recession in the U.K. and U.S. We estimate that each one percentage point drop in the policy rate increased birth rates amongst households eligible for a rate adjustment by 3%. 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.

The Impact of Covid-19 on China's Real Estate Market

The real estate industry is one of the most vital industries in any economy. The industry entails improvements to structures, roads, utility systems, and buildings and is responsible for creating many jobs. Many challenges have faced the real estate industry, including outbreaks of COVID-19 and Pneumoconiosis. The COVID-19 pandemic had a huge effect on the real estate industry, with sales of property declining significantly. There are three scenarios that can be used to explain the trajectory of the real estate industry after the pandemic. The first scenario, which is the negative scenario, shows that commercial property sales will decline by 13% year on year. The second optimistic scenario points out that sales will increase during the second half of the year and cause a 7% decrease year-on-year. Lastly, under the neutral scenario, sales will be the same as those of the previous years, and the decrease may exceed 10%. In conclusion, the real estate industry faces significant challenges due to the pandemic. There are likely to be differences in recovery as first-tier cities such as Shanghai and Beijing are expected to rebound due to a fall in mortgage rates and strong talent recruiting. Second-tier cities will experience the quickest recovery due to strong urban foundations, high population, housing demand, and economic resilience.

Monetary Policy and Demographics: Empirical Evidence for Housing Prices in Indonesia

The housing market in Indonesia has different characteristics for each region. These differences underlie changes in house prices, factors that affect house prices include Loan to Value (LTV), mortgage rate, income, and population. The data was obtained from relevant agencies of Bank Indonesia and the Statistics Indonesia, using data from 2012-2021, which is a combination of time-series data and a cross-section of 18 cities in Indonesia. The research method used is a regression panel. The results of the study of income levels, population, and Loan to Ratio (LTV) are significant to house prices, except for mortgage rates which not be effective in depressing housing price during the observation period.

A Natural Quasi-Experiment of the Monetary Policy Shocks on the Housing Markets of New Zealand during COVID-19

It is hard to experimentally test the impacts of monetary policy shocks on housing markets as it is very unlikely for a central bank to change monetary policies swiftly twice within a short period of time for exogenous reasons. However, during the pandemic, the central bank of New Zealand changed its policies 180 degree in 2 years, from an unprecedented low interest rate and a relaxed mortgage policy in 2020 to a 13-year record high interest rate and a tightened mortgage policy in 2022. Among the OECD members, New Zealand is the country that increased the interest rate the earliest and also the country that had its house prices fall the earliest. It provides natural quasi-experiments to test the monetary policy hypothesis empirically by the two policy changes as treatments on house prices. This study conducts a time series regression analysis on the housing markets of New Zealand to test the hypothesis in the pre-COVID and the COVID periods, ranging from 2016 Q2 to 2022 Q3. The results confirm that mortgage rates have a negative and significant effect on house price changes after controlling for the economic growth factor and the housing supply factor, no matter whether the monetary policy switches to expansionary or contractionary mode. The robustness test results of the housing markets show that a 1% fall/rise in the mortgage rate caused a 5.6% increase/decrease in house prices, ceteris paribus, in the COVID period. The results also do not support the housing supply hypothesis in New Zealand.

Forward Guidance and Household Expectations

AbstractWe compare causal effects of forward guidance about future interest rates on households’ expectations of inflation and nominal mortgage rates to the effects of communication about inflation in a randomized control trial using more than 20,000 U.S. consumers in the Nielsen Homescan Panel. We elicit consumers’ expectations, and then provide 22 different forms of information regarding past, current, and/or future interest rates and inflation. Information treatments about current or future interest rates all have similar and offsetting effects on interest rate and inflation expectations, yielding limited pass-through into perceived real rates. Information about mortgage rates has much more powerful effects on interest rate perceptions, with no offsetting effects on inflation expectations, thereby delivering much larger changes in perceived real rates. Revisions in perceived real rates causally lead to changes in the ex-post purchases of durable goods by households.

"The Impact of Macroeconomic Factors on the Change of Residential Prices" The case study of Albania

The housing market is a very important sector worldwide and occupies a significant part of their capital stock. Given that the economy is experiencing a difficult situation, because of the Covid-19 pandemic crisis, also based on the financial crisis of 2007-2008, their impact has been immediate in the change in house prices. Moreover, this paper will contain the investigation of some of the macroeconomic variables that affect housing prices in Albania. The study is built on econometric models, using bound test to understand what correlation relationship exists between GDP, inflation and mortgage rate and evaluating the "Autoregressive Distributive Lags" model in the short-term period, as well as looking at the perspective of a long-term period according to the "Vector Error Correction" (VEC) model. From the result obtained from E-views software, it is shown that depending on the time periods, the impact of these macro variables is different. If in the short term it seems that the impact of the mortgage rate is not a very substantial variable or inflation can have a negative impact, in long-terms is the opposite. To have a model that is as reliable and strong as possible, "battery" tests have also been analyzed to diagnose its constituent elements such as heteroskedasticity, autocorrelation, normality and the CUSUM / CUSUM square test for stability of the model. This paper applies to all areas, whose political implications can be found mainly for the bank, various investors or even policy makers, which may be the Bank of Albania, which should pursue policies to stimulate economic growth and show caution in the level of inflation created or setting the mortgage threshold.

How Mortgage Rates Affect Personal Savings Rates in the U.S.

Currently in the United States, we are experiencing a significant increase in mortgage interest rates. While there are various factors that influence mortgage rates, high mortgage rates have an effect on the economy. Specifically, how mortgage rates affect one’s ability to save money. In this study, I asked how mortgage rates affect the personal savings, while accounting for the NASDAQ 100 and the participation of women in the labor force. The results of the regression suggest that when mortgage rates increase, savings rates will also increase.

Explaining the Effects of Credit Score on Mortgage Rates

In this research project, we are trying to reject the null hypothesis that credit score does not affect the interest rate on a mortgage loan. This is important because the majority of homeowners have financed their home using a mortgage loan, and the interest rate they receive depends on many different factors, including credit scores. If homeowners are aware that a higher credit score will effectively help them lower the interest rate they pay on their mortgage, they can work to improve it and save money. Our main findings indicate that there is a significant relationship between mortgage interest rates, combined loan to value, unpaid principal balance, original loan term, occupancy, property type, and whether they are a first-time home buyer. The data also suggests that credit score does indeed have a statistically significant effect on what kind of interest rate borrowers receive on their loans. A higher credit score will tend to lower the interest payment homeowners must pay on their mortgage.

Monetary Policy and Home Buying Inequality

Does monetary policy influence who becomes a home owner? Home purchases by low- and moderate-income households may be particularly sensitive to mortgage interest rates, as these households’ budgets are tighter and they more frequently come up against binding payment-to-income ratio constraints in credit decisions. Exploiting the timing of high-frequency observations of mortgage applicants locking in their interest rates around monetary policy shocks, I find that a 1 percentage point policy-induced increase in mortgage rates lowers the presence of low-income households in the population of home buyers by 1 percentage point, and of low- and moderate-income households by 2 percentage points, immediately following the shock. Effects are substantially stronger among first-time home buyers, and persist for approximately one year.

Regional Variation in Transaction Costs, Mortgage Rate Heterogeneity, and Mortgage Refinancing Behavior

Regional Variation in Transaction Costs, Mortgage Rate Heterogeneity, and Mortgage Refinancing Behavior

Household Mobility and Mortgage Rate Lock *

Household Mobility and Mortgage Rate Lock *

Geographic Dependence and Diversification in House Price Returns: The Role of Leverage

Abstract We analyze the time variation in the average dependence within a set of regional monthly house price index returns in a regime-switching multivariate copula model with a high and a low dependence regime. Using equidependent Gaussian copulas, we show that the dependence of house price returns varies across time with changes in credit market conditions, which reduces the gains from the geographic diversification of real estate and mortgage portfolios. More specifically, we show that a decrease in leverage, measured by the loan-to-value ratio, and to a lesser extent an increase in mortgage rates, are associated with a higher probability of moving to and staying in the high dependence regime.