Working Paper

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

Abstract: 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.

Keywords: mortgage selection; mortgage choice; mortgage contracts; household finances; fixedrate; adjustable-rate;

JEL Classification: D01; G11; G21; R20;

https://doi.org/10.24148/wp2016-28

Bibliographic Information

Provider: Federal Reserve Bank of San Francisco

Part of Series: Working Paper Series

Publication Date: 2019-03-01

Number: 2016-28

Note: Previous version published 11/10/2016 as "Mortgage Choice: Interactive Effects of House Price Appreciation and Mortgage Pricing Components", Federal Reserve Bank of San Francisco Working Paper 2016-28

Note: Earlier version published 5/2014 as “Mortgage Choice in the Housing Boom: Impact of House Price Appreciation and Borrower Type", Federal Reserve Bank of San Francisco, Working Paper 2014-05.