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A Note on Residential Mortgage Selection: Borrower Decisions and Inflation Expectations

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Abstract

In this note, the choice of mortgage instrument in an inflationary environment was analyzed. Using Federal Home Loan Bank data on the proportion of loans closed as variable-rate mortgages for the period 1981 to 1987, it was found that higher anticipated inflation held with certainty increased this proportion, while greater inflation uncertainty in the sense of a Diamond-Stiglitz mean-preserving spread decreased this proportion. That is, homebuyers appear to prefer fixed-rate mortgages in the presence of inflation uncertainty and to reject lender efforts to shift interest-rate risk through variable-rate mortgages.

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  • Paul M. Taube & Don N. MacDonald, 1989. "A Note on Residential Mortgage Selection: Borrower Decisions and Inflation Expectations," Journal of Real Estate Research, American Real Estate Society, vol. 4(1), pages 73-79.
    • Handle: RePEc:jre:issued:v:4:n:1:1989:p:73-79
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    1. Baesel, Jerome B. & Biger, Nahum, 1980. "The Allocation of Risk: Some Implications of Fixed versus Index-Linked Mortgages," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 15(2), pages 457-468, June.
    2. Diamond, Peter A. & Stiglitz, Joseph E., 1974. "Increases in risk and in risk aversion," Journal of Economic Theory, Elsevier, vol. 8(3), pages 337-360, July.
    3. Santomero, Anthony M, 1983. "Fixed versus Variable Rate Loans," Journal of Finance, American Finance Association, vol. 38(5), pages 1363-1380, December.
    4. Kearl, J R, 1979. "Inflation, Mortgages, and Housing," Journal of Political Economy, University of Chicago Press, vol. 87(5), pages 1115-1138, October.
    5. L. Dwayne Barney & Harry White, 1986. "The Optimal Mortgage Payment Path Under Price Uncertainty," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 14(3), pages 406-413, September.
    6. Donald J. Smith, 1987. "The Borrower's Choice between Fixed and Adjustable Rate Loan Contracts," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 15(2), pages 110-116, June.
    7. Jan K. Brueckner, 1984. "The Flexible Mortgage: Optimal Financing of a Consumer Durable," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 12(2), pages 136-152, June.
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    Cited by:

    1. Tiziano Ropele & Yuriy Gorodnichenko & Olivier Coibion, 2022. "Inflation Expectations and Corporate Borrowing Decisions: New Causal Evidence," NBER Working Papers 30537, National Bureau of Economic Research, Inc.

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    JEL classification:

    • L85 - Industrial Organization - - Industry Studies: Services - - - Real Estate Services

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