Working Paper: NBER ID: w20408
Authors: Cristian Badarinza; John Y. Campbell; Tarun Ramadorai
Abstract: The relative popularity of adjustable-rate mortgages (ARMs) and fixed-rate mort- gages (FRMs) varies considerably both across countries and over time. We ask how movements in current and expected future interest rates affect the share of ARMs in total mortgage issuance. Using a nine-country panel and instrumental variables methods, we present evidence that near-term (one-year) rational expectations of future movements in ARM rates do affect mortgage choice, particularly in more recent data since 2001. However longer-term (three-year) rational forecasts of ARM rates have a relatively weak effect, and the current spread between FRM and ARM rates also matters, suggesting that households are concerned with current interest costs as well as with lifetime cost minimization. These conclusions are robust to alternative (adaptive and survey-based) models of household expectations.
Keywords: Adjustable-rate mortgages; Interest rates; Household finance; Mortgage choice
JEL Codes: D14; E43; G21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| interest rates (E43) | mortgage choice (G51) |
| near-term rational expectations of future ARM rates (E43) | mortgage choice (G51) |
| longer-term rational forecasts of ARM rates (E47) | mortgage choice (G51) |
| current fixed-rate mortgage (FRM) to ARM spread (G21) | ARM share (C22) |