This website uses cookies.

By clicking the "Accept" button or continuing to browse our site, you agree to first-party and session-only cookies being stored on your device to enhance site navigation and analyze site performance and traffic. For more information on our use of cookies, please see our Privacy Policy.

  1. Home
  2. ASSA Annual Meeting
  3. 2024
  4. Program
  5. The Mortgage Market and the Macroeconomy
« Back to Results

The Mortgage Market and the Macroeconomy

Paper Session

Saturday, Jan. 6, 2024 8:00 AM - 10:00 AM (CST)

Convention Center, 221A
Hosted By: American Economic Association
  • Chair: John Campbell, Harvard University

Housing Wealth and Consumption: The Role of Heterogeneous Credit Constraints

Boragan Aruoba
,
University of Maryland
Ronel Elul
,
Federal Reserve Bank of Philadelphia
Şebnem Kalemli-Özcan
,
University of Maryland

Abstract

We quantify the role of heterogeneity in households’ financial constraints in explaining the large decline in aggregate consumption between 2006 and 2009 using individual-level data. Financial constraints can explain 56% of the aggregate response of consumption to changes
in house prices. Local general equilibrium feedback and decline in bank credit to consumers make up the remaining 44%. Our results show that a large part of the response that was attributed to wealth effects in the prior literature, can in fact be explained by heterogeneity in households’ financial constraints.

Heterogeneous Mortgage Choice: Evidence from Denmark

Steffen Andersen
,
Copenhagen Business School and Danmarks Nationalbank
John Campbell
,
Harvard University
Joao Cocco
,
London Business School
Christopher J. Hansman
,
Imperial College London
Tarun Ramadorai
,
Imperial College London

Abstract

We study the cross-sectional determinants of mortgage choice using Danish administrative data, and find many patterns consistent with theory although there is a great deal of noise in individual mortgage decisions. Older borrowers and those with large mortgages tend to choose ARMs. ARM choice is associated with a higher probability of a subsequent move, but this is not the case for borrowers with high levels of debt relative to their income who may choose ARMs to alleviate constraints regardless of whether they intend to move or not. Using survey data to measure beliefs, we find that households who expect higher inflation are more likely to choose FRMs while those who expect their own financial situation to improve are more likely to choose ARMs. We document a U-shaped relationship between the ARM share and net wealth. In the US, such a relationship might be explained by government support for FRMs among conforming mortgages taken out by borrowers with intermediate levels of wealth; however, this cannot be the explanation in Denmark. Our interpretation is that ARMs have a dual clientele that includes both borrowers with very low income and high bank debt, who are plausibly constrained, and borrowers with high financial assets who may be using ARMs to leverage financial investments.

The Housing Wealth Effect: Quasi-Experimental Evidence

Roine Vestman
,
Stockholm University
Jesper Bojeryd
,
University of California-Los Angeles
Björn Tyrefors
,
Research Institute for Industrial Economics
Dany Kessel
,
Södertörn University

Abstract

Empirical studies have estimated a big range of consumption response sizes to changes in house prices. Using a quasi-experiment, we estimate a shock of -19.4 percent to house prices in the area surrounding an airport in Stockholm after its operations were unexpectedly continued as a result of political bargaining behind closed doors. This source of price divergence is ideal for identifying housing wealth effects since it is local and unrelated to variations in macroeconomic conditions. Using a household data set with information on the location of primary residence relative to the airport, we find a short-run elasticity with respect to new car purchases of 0.39, corresponding to a one-year marginal propensity for car expenditures of 0.12 cents per dollar lost in housing wealth. Households with high loan-to-value ratios and little bank deposits respond the most. A quantitative model is consistent with the empirical findings and pinpoints important determinants of the response size, which may explain the variation in previous estimates.

Discussant(s)
Kurt Mitman
,
Stockholm University
Stijn Van Nieuwerburgh
,
Columbia University
Johannes Wieland
,
University of California-San Diego
JEL Classifications
  • E2 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy
  • G5 - Household Finance