The Effect of Interest Rates on Home Buying: Evidence from a Shock to Mortgage Insurance Premiums

58 Pages Posted: 12 Dec 2017 Last revised: 26 Jan 2019

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: January 16, 2019

Abstract

Regression discontinuity estimates indicate that home buying is highly responsive to interest rates in a large segment of the population. A surprise 50 basis point cut in the effective interest rate for mortgages insured by the Federal Housing Administration (FHA) led to an immediate 14 percent increase in home buying among the FHA-reliant population. We show that this large, extensive-margin effect arises from the rate cut helping borrowers overcome maximum debt payment to income (DTI) thresholds. We conclude that binding DTI constraints are an important feature of the mortgage market that amplify the effect of interest rate shocks.

Keywords: Interest rates, home buying, FHA, mortgages, mortgage insurance, credit rationing, debti to income, payment to income, regression discontinuity, monetary policy, stimulus

JEL Classification: R21, R28, E5, G18, G21

Suggested Citation

Bhutta, Neil and Ringo, Daniel, The Effect of Interest Rates on Home Buying: Evidence from a Shock to Mortgage Insurance Premiums (January 16, 2019). Available at SSRN: https://ssrn.com/abstract=3085008 or http://dx.doi.org/10.2139/ssrn.3085008

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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