53 Pages Posted: 10 Sep 2007
Date Written: September 2007
The fraction of newly-originated mortgages that are of the adjustable-rate (ARM) versus the fixed-rate (FRM) type exhibits a surprising amount of time variation. A simple utility framework of mortgage choice points to the bond risk premium as theoretical determinant: when the bond risk premium is high, FRM payments are high, making ARMs more attractive. We confirm empirically that the bulk of the time variation in household mortgage choice can be explained by time variation in the bond risk premium. This is true regardless of whether bond risk premia are measured using forecasters' data, a VAR term structure model, or a simple rule-of-thumb based on adaptive expectations. This simple rule-of-thumb moves in lock-step with mortgage choice, thereby lending further credibility to a theory of strategic mortgage timing by households.
Suggested Citation: Suggested Citation
Koijen, Ralph S. J. and Van Hemert, Otto and Van Nieuwerburgh, Stijn, Mortgage Timing (September 2007). NBER Working Paper No. w13361. Available at SSRN: https://ssrn.com/abstract=1012815