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Federal Reserve Bank of San Francisco
Working Paper Series
Mortgage Choice: Interactive Effects of House Price Appreciation and Mortgage Pricing Components
Frederick T. Furlong
Yelena Takhtamanova
David Lang
Abstract

Previous research provides rationales for and evidence of a link between house price appreciation and mortgage choice, with higher appreciation associated with higher take-up rates for adjustable-rate mortgages relative to fixed-rate mortgages. Research also finds mortgage interest rates and their underlying components to be important determinants of mortgage financing choices. In this paper we extend the earlier research and show that house price appreciation can have important interactive effects with those other determinants of mortgage financing choices. The analysis focuses 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. We find that higher house price appreciation dampened the estimated sensitivity of take-up rates among mortgage financing options to the underlying mortgage pricing components. The results, which are especially robust for fixed-rate and adjustable-rate mortgages that are fully amortized, were not driven solely by observations in markets with especially high rates of house price appreciation. Moreover, after taking into account the interactive effects with mortgage pricing components, house price appreciation is estimated to have had relatively little additional effect on take-up rates among mortgage financing options.


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Frederick T. Furlong & Yelena Takhtamanova & David Lang, Mortgage Choice: Interactive Effects of House Price Appreciation and Mortgage Pricing Components, Federal Reserve Bank of San Francisco, Working Paper Series 2016-28, 10 Nov 2016.
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Note: An earlier version of this study was titled “Mortgage Choice in the Housing Boom: Impact of House Price Appreciation and Borrower Type.” Federal Reserve Bank of San Francisco, Working Paper 2014-05.
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DOI: 10.24148/wp2016-28
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