Working Paper

Monetary Policy and Home Buying Inequality

Abstract: 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.

Keywords: Home ownership; Inequality; Monetary policy; Interest rates; Credit constraints;

JEL Classification: G21; E43; E44; R21;

https://doi.org/10.17016/FEDS.2023.006

Bibliographic Information

Provider: Board of Governors of the Federal Reserve System (U.S.)

Part of Series: Finance and Economics Discussion Series

Publication Date: 2023-01-20

Number: 2023-006