Interest Rates and Equity Extraction During the Housing Boom

55 Pages Posted: 10 Jan 2014 Last revised: 12 Apr 2017

See all articles by Neil Bhutta

Neil Bhutta

Board of Governors of the Federal Reserve System

Benjamin J. Keys

The Wharton School - University of Pennsylvania, Real Estate Department

Date Written: July 29, 2015

Abstract

Using credit record panel data from 1999-2010, we show that the likelihood of home equity extraction (borrowing, on average, about $40,000 against one's home) peaked in 2003 when mortgage rates hit historic lows, and estimate that a 100 basis point rate decline is associated with a 25 percent rise in the likelihood of extraction. Further, this relationship is amplified in ZIP codes with substantial house price growth. Differential responses to interest rates and home price appreciation by age and credit score provide new evidence of financial frictions. Finally, equity extraction is associated with higher default risk, especially for extractors in 2006 who were more than twice as likely to become delinquent on a mortgage than non-extractors over the next four years.

Keywords: equity extraction, interest rates, monetary policy, credit constraints, mortgages, credit records, household finance

JEL Classification: D12, E52, R20, G21

Suggested Citation

Bhutta, Neil and Keys, Benjamin J., Interest Rates and Equity Extraction During the Housing Boom (July 29, 2015). Kreisman Working Papers Series in Housing Law and Policy No. 3. Available at SSRN: https://ssrn.com/abstract=2377124 or http://dx.doi.org/10.2139/ssrn.2377124

Neil Bhutta

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Benjamin J. Keys (Contact Author)

The Wharton School - University of Pennsylvania, Real Estate Department ( email )

Philadelphia, PA 19104-6330
United States

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