Mortgage Rates, Household Balance Sheets, and the Real Economy

Abstract

This paper investigates the impact of lower mortgage rates on household balance sheets and other economic outcomes during the housing crisis. We use proprietary loan-level panel data matched to consumer credit records using borrowers' Social Security numbers, which allows for accurate measurement of the effects. Our main focus is on borrowers with agency loans, which constitute the vast majority of U.S. mortgage borrowers. Using a difference-in-differences framework that exploits variation in the timing of rate resets of adjustable rate mortgages with different fixed-rate periods, we find that a sizable decline in mortgage payments ($150 per month on average) induces a significant drop in mortgage defaults, an increase in new financing of durable consumption (auto purchases) of more than 10% in relative terms, and an overall improvement in household credit standing. We identify important heterogeneity in the ability of monetary policy to stimulate households' consumption: Low-wealth borrowers are especially responsive to reductions in mortgage payments, while credit-constrained households use more than 70% of their increased liquidity to deleverage, dampening their consumption response. These findings also qualitatively hold in a sample of less-prevalent borrowers with private non-agency loans. We then use regional variation in mortgage contract types to explore the impact of lower mortgage rates on broader economic outcomes. Regions more exposed to mortgage rate declines saw a relatively faster recovery in house prices, increased durable (auto) consumption, and increased employment growth, with responses concentrated in the non-tradable sector. Our findings have implications for the pass-through of monetary policy to the real economy through mortgage contracts and household balance sheets.

Keywords: Household Leverage, Crisis, Deleveraging, Monetary Policy, Mortgage Rates, Household Consumption, Adjustable-Rate Mortgages

JEL Classification: D12, E20, E51, E65, G21