Mortgage timing
By: Ralph S. J. Koijen, Otto Van Hemert, Stijn Van Nieuwerburgh.
Contributors: Hemert, Otto van, 1977-; Nieuwerburgh, Stijn van.; National Bureau of Economic Research.
Series: NBER working paper series -- no. 13361.; Working paper series (National Bureau of Economic Research) -- working paper no. 13361.
Publisher: National Bureau of Economic Research
Published: 2007
Place of publication: Cambridge, Mass
Language: eng
Number of pages: 51
Subjects: Mortgages -- Economic aspects
Description: The fraction of newly-originated mortgages that are of the adjustable-rate (ARM) versus the fixed-rate (FRM) type exhibits a surprising amount of time variation. A simple utility framework of mortgage choice points to the bond risk premium as theoretical determinant: when the bond risk premium is high, FRM payments are high, making ARMs more attractive. We confirm empirically that the bulk of the time variation in household mortgage choice can be explained by time variation in the bond risk premium. This is true regardless of whether bond risk premia are measured using forecasters' data, a VAR term structure model, or a simple rule-of-thumb based on adaptive expectations. This simple rule-of-thumb moves in lock-step with mortgage choice, thereby lending further credibility to a theory of strategic mortgage timing by households.
Notes: "September 2007"

Includes bibliographical references (p. 29-31).

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