Mortgage timing
Journal
Journal of Financial Economics
Subject
Finance
Publishing details
Authors / Editors
Koijen R S J;Van Hemert O;Van Nieuwerburgh S
Publication Year
2009
Abstract
We study how the term structure of interest rates relates to mortgage choice at both household and aggregate levels. A simple utility framework of mortgage choice points to the long-term bond risk premium as distinct from the yield spread and the long yield as a theoretical determinant of mortgage choice: when the bond risk premium is high, fixed-rate mortgage payments are high, making adjustable-rate mortgages more attractive. We confirm empirically that the bulk of the time variation in both aggregate and loan-level mortgage choice can be explained by time variation in the bond risk premium, whether bond risk premia are measured using forecasters’ data, a vector autoregressive (VAR) term structure model, or a simple household decision rule based on adaptive expectations. The household decision rule moves in lock-step with mortgage choice, lending credibility to a theory of strategic mortgage timing by households.
Keywords
Mortgage choice; Household finance; Bond risk premia
Publication Research Centre
Institute of Finance and Accounting
Available on ECCH
No