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House Prices, Debt Burdens, and the Heterogeneous Effects of Mortgage Rate Shocks

Author

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  • William D. Larson
  • Andrew B. Martinez

Abstract

We examine the heterogeneous effects of mortgage interest rate shocks on house prices in a monthly panel of U.S. cities. Mortgage interest rate shocks, identified using Blue Chip forecast errors and monetary policy surprises, affect house prices more in cities where more borrowers have high debt burdens, consistent with a model with both price frictions and credit constraints. Responsiveness to interest rate shocks thus varies by location and time period, and is related to both borrower characteristics and underwriting rules. This has important implications for understanding monetary policy transmission, systemic risk, and the role of household finances in the macroeconomy.

Suggested Citation

  • William D. Larson & Andrew B. Martinez, 2024. "House Prices, Debt Burdens, and the Heterogeneous Effects of Mortgage Rate Shocks," Working Papers 2024-002, The George Washington University, Department of Economics, H. O. Stekler Research Program on Forecasting.
    • Handle: RePEc:gwc:wpaper:2024-002
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    1. Aditya Aladangady & Jacob Krimmel & Tess C. Scharlemann, 2024. "Locked In: Rate Hikes, Housing Markets, and Mobility," Finance and Economics Discussion Series 2024-088, Board of Governors of the Federal Reserve System (U.S.).

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    More about this item

    Keywords

    Asset Pricing; Household Finance; House Price Bubbles;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G51 - Financial Economics - - Household Finance - - - Household Savings, Borrowing, Debt, and Wealth
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • R30 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - General
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models

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