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Effects of Mortgage Interest Rates on House Price Appreciation: The Role of Payment Constraints

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  • William D. Larson

    (Federal Housing Finance Agency)

Abstract

This research examines the effects of mortgage interest rates on house prices in the 100 largest U.S. cities, with appreciation driven by both short-run dynamics and convergence towards long-run economic fundamentals. The nature of the long-run equilibrium depends on the elasticity of housing supply, and the speed of adjustment to this long-run equilibrium depends on the degree to which borrowers are near monthly debt service payment constraints. Accordingly, the pass-through of mortgage interest rates to house prices is location and time-varying. This has implications for our understanding of monetary policy transmission, systemic risk, and the role of household finances in the macroeconomy.

Suggested Citation

  • William D. Larson, 2022. "Effects of Mortgage Interest Rates on House Price Appreciation: The Role of Payment Constraints," FHFA Staff Working Papers 22-04, Federal Housing Finance Agency.
    • Handle: RePEc:hfa:wpaper:22-04
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    1. Bosshardt, Joshua & Di Maggio, Marco & Kakhbod, Ali & Kermani, Amir, 2024. "The credit supply channel of monetary policy tightening and its distributional impacts," Journal of Financial Economics, Elsevier, vol. 160(C).

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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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