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What Calls to ARMs? International Evidence on Interest Rates and the Choice of Adjustable-Rate Mortgages

Author

Listed:
  • Cristian Badarinza

    (Department of Real Estate, National University of Singapore, Singapore 117566; Centre for Economic Policy Research, London EC1V 0DX; Institute of Real Estate Studies, Singapore 119613)

  • John Y. Campbell

    (Department of Economics, Harvard University, Cambridge, Massachusetts 02138; National Bureau of Economic Research, Cambridge, Massachusetts 02138)

  • Tarun Ramadorai

    (Centre for Economic Policy Research, London EC1V 0DX; National Bureau of Economic Research, Cambridge, Massachusetts 02138; Imperial College London, South Kensington Campus, London SW7 2AZ)

Abstract

The relative popularity of adjustable-rate mortgages (ARMs) and fixed-rate mortgages (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 forecasts 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.

Suggested Citation

  • Cristian Badarinza & John Y. Campbell & Tarun Ramadorai, 2018. "What Calls to ARMs? International Evidence on Interest Rates and the Choice of Adjustable-Rate Mortgages," Management Science, INFORMS, vol. 64(5), pages 2275-2288, May.
    • Handle: RePEc:inm:ormnsc:v:64:y:2018:i:5:p:2275-2288
    DOI: mnsc.2016.2629
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    References listed on IDEAS

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    More about this item

    Keywords

    mortgage choice; adjustable rate; fixed rate; household finance;
    All these keywords.

    JEL classification:

    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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