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Alternative Mortgage Instruments, Qualification Constraints and the Demand for Housing: An Empirical Analysis

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  • Richard A. Phillips
  • James H. VanderHoff

Abstract

Government‐guaranteed mortgage loans (GFRMs) and adjustable‐rate mortgages (ARMs) were introduced to make payment to income (PTI) and loan‐to‐value (LTV) qualification conventions less restrictive. This paper analyzes the effect of GFRMs and ARMs on the demand for housing. Using a large national data set for the 1988 to 1989 period, we employ a two‐stage procedure to estimate housing demand. In the first stage, a multinomial logit model estimates the probability of choosing an FRM, ARM or GFRM. Predicted values from the logit are used to construct user costs and estimate housing demand. Using the model estimates, we simulate demand under four different mortgage availability regimes: FRM, FRM and GFRM, FRM and ARM and all three. These simulations indicate that GFRMs, by relaxing LTV constraints, increase housing demand by approximately 6.2% relative to the FRM regime; the addition of ARMs, by relaxing both PTI and LTV constraints, raises demand by an additional 6%, for a total of 12.2% with inclusion of all alternatives.

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  • Richard A. Phillips & James H. VanderHoff, 1994. "Alternative Mortgage Instruments, Qualification Constraints and the Demand for Housing: An Empirical Analysis," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 22(3), pages 453-477, September.
    • Handle: RePEc:bla:reesec:v:22:y:1994:i:3:p:453-477
    DOI: 10.1111/1540-6229.00643
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    References listed on IDEAS

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    1. Green, Richard K. & Shilling James D., 1994. "Do Teaser-Rate Adjustable-Rate Mortgages Make Owner-Occupied Housing More Affordable?," Journal of Housing Economics, Elsevier, vol. 3(4), pages 263-282, December.
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    Cited by:

    1. Horst Tomann, 1996. "Private Home-ownership Finance for Low-income Households," Urban Studies, Urban Studies Journal Limited, vol. 33(10), pages 1879-1889, December.
    2. Philomena M. Bacon & Peter G. Moffatt, 2012. "Mortgage Choice as a Natural Field Experiment on Choice under Risk," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 44(7), pages 1401-1426, October.
    3. Masaki Mori & Julian Diaz III & Alan J. Ziobrowski, 2009. "Why Do Borrowers Choose Adjustable-Rate Mortgages over Fixed-Rate Mortgages? : A Behavioral Investigation," International Real Estate Review, Global Social Science Institute, vol. 12(2), pages 98-120.
    4. Richard Anderson & James VanderHoff, 1999. "Mortgage Default Rates and Borrower Race," Journal of Real Estate Research, American Real Estate Society, vol. 18(2), pages 279-290.
    5. Onder, Zeynep, 2002. "Homeownership and FHA Mortgage Activity in Neighborhoods and Metropolitan Areas," Journal of Housing Economics, Elsevier, vol. 11(2), pages 152-181, June.
    6. D. Duffy & M.J. Roche, 2005. "Heterogeneous Homebuyers, Mortgage Choice and the use of Mortgage Brokers," Economics Department Working Paper Series n1520205, Department of Economics, National University of Ireland - Maynooth.

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