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  4. February 2017
  5. The Interest Rate Elasticity of Mortgage Demand: Evidence from Bunching at the Conforming Loan Limit

The Interest Rate Elasticity of Mortgage Demand: Evidence from Bunching at the Conforming Loan Limit

  • Anthony A. DeFusco
  • Andrew Paciorek
American Economic Journal: Economic Policy
vol. 9, no. 1, February 2017
(pp. 210-40)
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Abstract

This paper provides novel estimates of the interest rate elasticity of mortgage demand by measuring the degree of bunching in response to a discrete jump in interest rates at the conforming loan limit--the maximum loan size eligible for purchase by Fannie Mae and Freddie Mac. The estimates indicate that a 1 percentage point increase in the rate on a 30-year fixed-rate mortgage reduces first mortgage demand by between 2 and 3 percent. One-third of this response is driven by borrowers who take out second mortgages, which implies that total mortgage debt only declines by 1.5 to 2 percent.

Citation

DeFusco, Anthony A., and Andrew Paciorek. 2017. "The Interest Rate Elasticity of Mortgage Demand: Evidence from Bunching at the Conforming Loan Limit." American Economic Journal: Economic Policy, 9 (1): 210-40. DOI: 10.1257/pol.20140108

Additional Materials

JEL Classification

  • D14 Household Saving; Personal Finance
  • G21 Banks; Depository Institutions; Micro Finance Institutions; Mortgages
  • R21 Urban, Rural, Regional, Real Estate, and Transportation Economics: Housing Demand
  • R31 Housing Supply and Markets
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