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Board of Governors of the Federal Reserve System (US)
Finance and Economics Discussion Series
The Effect of Interest Rates on Home Buying : Evidence from a Discontinuity in Mortgage Insurance Premiums
Neil Bhutta
Daniel R. Ringo
Abstract

We study the effect of interest rates on the housing market by taking advantage of a sudden and unexpected price change in a large government mortgage program. The Federal Housing Administration (FHA) insures most mortgages to lower-downpayment, lower credit score borrowers, including a majority of first-time homebuyers. The FHA charges borrowers an annual mortgage insurance premium (MIP), and in January, 2015 the FHA abruptly reduced the MIP, and thus FHA borrowers’ effective interest rate, by 50 basis points. Using a regression discontinuity design, we find that the MIP reduction increased the number of home purchase originations among the FHA-reliant population by nearly 14 percent. The response to the premium cut was negatively correlated with borrower income, with no observable response among relatively high income borrowers. We trace part of the jump in home buying to the MIP reduction helping ease binding debt payment-to-income ratio limits thus allowing more applications to be approved. Finally, we find no evidence that the MIP reduction increased house prices.


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Neil Bhutta & Daniel R. Ringo, The Effect of Interest Rates on Home Buying : Evidence from a Discontinuity in Mortgage Insurance Premiums, Board of Governors of the Federal Reserve System (US), Finance and Economics Discussion Series 2017-086, 17 Aug 2017.
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Keywords: Interest rates ; Mortgages and credit ; Residential real estate
DOI: 10.17016/FEDS.2017.086
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