Mortgage Rates, Household Balance Sheets, and the Real Economy

61 Pages Posted: 6 Oct 2014 Last revised: 7 Nov 2014

Benjamin J. Keys

The Wharton School - University of Pennsylvania, Real Estate Department

Tomasz Piskorski

Columbia Business School - Finance and Economics

Amit Seru

Stanford University

Vincent W. Yao

Georgia State University - J. Mack Robinson College of Business

Multiple version iconThere are 2 versions of this paper

Date Written: September 30, 2014

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

Suggested Citation

Keys, Benjamin J. and Piskorski, Tomasz and Seru, Amit and Yao, Vincent W., Mortgage Rates, Household Balance Sheets, and the Real Economy (September 30, 2014). Columbia Business School Research Paper No. 14-53. Available at SSRN: https://ssrn.com/abstract=2505691 or http://dx.doi.org/10.2139/ssrn.2505691

Benjamin J. Keys

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

Philadelphia, PA 19104-6330
United States

Tomasz Piskorski

Columbia Business School - Finance and Economics ( email )

3022 Broadway
New York, NY 10027
United States

Amit Seru (Contact Author)

Stanford University ( email )

650 Knight Management
Stanford, CA 94305
United States

Vincent W. Yao

Georgia State University - J. Mack Robinson College of Business ( email )

35 Broad Street
Atlanta, GA 30303-3083
United States

Paper statistics

Downloads
727
Rank
26,136
Abstract Views
2,908