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The Interest Rate Elasticity of Mortgage Demand
Report

The Interest Rate Elasticity of Mortgage Demand

Evidence From Bunching at the Conforming Loan Limit


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Editorial Rating

7

Qualities

  • Innovative

Recommendation

Most modern economies depend, to varying degrees, on the housing industry to generate growth. While reckless government promotion of home ownership can cause excesses such as those that happened in the United States, Spain and Ireland leading up to the 2008 housing bust, overly cautious policies can dampen economic development. As officials tweak the rules on mortgages to thwart prerecession extremes, it is important to understand how the costs of new regulations affect the housing and debt markets. While this paper may try too hard to find more answers than the data might bear, getAbstract applauds its bold attempt at addressing tough questions.

Take-Aways

  • A quirk in the US mortgage market allows researchers to estimate the elasticity of mortgage demand – that is, the extent to which the amount of mortgage borrowing varies – in response to changes in interest rates.
  • US mortgage loans over a certain amount – “jumbo loans” – incur an extra interest cost because they’re not eligible for purchase by government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac.
  • This penalty encourages a borrower to keep a first mortgage below the government-imposed limit. Mortgagor behavior suggests that a 1% rise in a mortgage’s interest rate reduces the loan amount sought by 2% to 3%.

About the Authors

Anthony A. DeFusco is a doctoral student at The Wharton School. Andrew Paciorek is an economist with the Board of Governors of the Federal Reserve System.