House Prices, Mortgages, and Monetary Policy
Sunday, Jan. 6, 2019 8:00 AM - 10:00 AM
- Chair: Emi Nakamura, University of California-Berkeley
Rental Markets and the Effect of Credit Conditions on House Prices
AbstractTo what extent did an expansion and contraction of credit drive the housing boom and bust? Papers such as Favilukis, Ludvigson, and Van Nieuwerburgh (2017) and Justiniano, Primiceri, and Tambalotti (2015) argue that credit conditions can explain essentially all of the movements in house prices in the 2000s, while others such as Kaplan, Mitman, and Violante (2017) argue that credit conditions explain none of the boom and bust. The key difference is in how these papers model the rental market: the former model perfect segmentation between the rental and owner-occupied stocks, while the latter model complete integration and conversion by deep-pocketed investors. The importance of credit for house prices thus hinges on how one models the rental market. In this paper, we introduce a dynamic equilibrium model with household and housing stock heterogeneity that nests both extremes. Our model provides a simple, supply-and-demand interpretation of these seemingly divergent results. We structurally estimate our model to evaluate how rental markets should be modeled and consequently how important credit is for housing cycles.
No Job, No Money, No Refi: Frictions to Refinancing in a Recession
AbstractWe study how employment documentation requirements and out-of-pocket closing costs constrain mortgage refinancing. These frictions, which bind most severely during recessions, may significantly inhibit monetary policy pass-through. To study their effects on refinancing, we exploit an FHA policy change that excluded unemployed borrowers from refinancing and increased others’ out-of-pocket costs substantially. These changes dramatically reduced refinancing rates, particularly among the likely unemployed and those facing new out-of-pocket costs. Our results imply that unemployed and liquidity-constrained borrowers have a high latent demand for refinancing. Cyclical variation in these factors may therefore affect both the aggregate and distributional consequences of monetary policy.
Mortgage Prepayment and Path-Dependent Effects of Monetary Policy
AbstractThe fixed rate mortgage, prepayable at the option of the homeowner, is the dominant household debt contract in the U.S. We develop a theory linking short term interest rates to mortgages rates in an environment where households are inattentive and thus behave sub-optimally. We characterize not only the behavior of mortgage rates across interest rate environments, but also how the mortgage coupon distribution in the population is expected to vary over time, based on interest rate movements and prepayments. Our analytical solution allows for a range of comparative static results that can be readily taken to the data. Our theory has implications for the transmission of U.S. monetary policy via the mortgage market through the prepayment channel. Finally, we show how our model apparatus can be transported into larger macro models to study dynamic responses to interest rate shocks in environments where mortgage debt is prepayable.
University of Chicago
Massachusetts Institute of Technology
University of Pennsylvania and NBER
Stanford University and NBER
- E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit
- G1 - General Financial Markets