The Effect of Interest Rates on Home Buying: Evidence from a Discontinuity in Mortgage Insurance Premiums

55 Pages Posted: 7 Sep 2017

See all articles by Neil Bhutta

Neil Bhutta

Board of Governors of the Federal Reserve System

Daniel Ringo

Board of Governors of the Federal Reserve System

Multiple version iconThere are 2 versions of this paper

Date Written: 2017-08-17

Abstract

We study the effect of interest rates on the housing market by taking advantage of a sudden and unexpected price change in a large government mortgage program. The Federal Housing Administration (FHA) insures most mortgages to lower-downpayment, lower credit score borrowers, including a majority of first-time homebuyers. The FHA charges borrowers an annual mortgage insurance premium (MIP), and in January, 2015 the FHA abruptly reduced the MIP, and thus FHA borrowers’ effective interest rate, by 50 basis points. Using a regression discontinuity design, we find that the MIP reduction increased the number of home purchase originations among the FHA-reliant population by nearly 14 percent. The response to the premium cut was negatively correlated with borrower income, with no observable response among relatively high income borrowers. We trace part of the jump in home buying to the MIP reduction helping ease binding debt payment-to-income ratio limits thus allowing more applications to be approved. Finally, we find no evidence that the MIP reduction increased house prices.

Keywords: Interest rates, Mortgages and credit, Residential real estate

JEL Classification: R21, R28, E52, G18

Suggested Citation

Bhutta, Neil and Ringo, Daniel, The Effect of Interest Rates on Home Buying: Evidence from a Discontinuity in Mortgage Insurance Premiums (2017-08-17). FEDS Working Paper No. 2017-086. Available at SSRN: https://ssrn.com/abstract=3029736 or http://dx.doi.org/10.17016/FEDS.2017.086

Neil Bhutta (Contact Author)

Board of Governors of the Federal Reserve System ( email )

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

Daniel Ringo

Board of Governors of the Federal Reserve System ( email )

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

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