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The sensitivity of housing demand to financing conditions: evidence from a survey

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  • Andreas Fuster
  • Basit Zafar

Abstract

The sensitivity of housing demand to mortgage rates and available leverage is key to understanding the effect of monetary and macroprudential policies on the housing market. However, since there is generally no exogenous variation in these variables that is independent of confounding factors (such as economic conditions or household characteristics), it is difficult to cleanly estimate these sensitivities empirically. We circumvent these issues by designing a strategic survey in which respondents are asked for their willingness to pay (WTP) for a home comparable to their current one, under different financing scenarios. We vary mortgage rates, down payment constraints, and non-housing wealth. We find that a relaxation of down payment constraints, or an exogenous increase in non-housing wealth, has large effects on WTP, especially for relatively poorer and more credit-constrained borrowers. On the other hand, changing the mortgage rate by 2 percentage points only changes WTP by about 5 percent on average. These findings have implications for theoretical models of house price determination, as well as for policy.

Suggested Citation

  • Andreas Fuster & Basit Zafar, 2014. "The sensitivity of housing demand to financing conditions: evidence from a survey," Staff Reports 702, Federal Reserve Bank of New York.
    • Handle: RePEc:fip:fednsr:702
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    More about this item

    Keywords

    housing demand; mortgage rates; down payment requirements; user cost model; household surveys;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • R21 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - Housing Demand

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