Alternative Mortgage Instruments, Qualifications Constraints, and the Demand for Housing: An Empirical Analysis
Posted: 25 Oct 1999
Government-guaranteed mortgage loans (GFRMs) and adjustable- rate mortgages (ARMs) were introduced to make payment to income (PTI) and loan to value (LTV) qualification conven- tions less restrictive. This paper analyzes the effect of GFRMs and ARMs on the demand for housing. Using a large national data set for the 1988 to 1989 period, we employ a two-stage procedure to estimate housing demand. In the first stage, a multinominal logit model estimates the probability of choosing an FRM, ARM, or GFRM. Predicted values from the logit are used to construct user costs and estimate housing demand. Using the model estimates, we simulate demand under four different mortgage availability regimes: FRM, FRM and GFRM, FRM and ARM, and all three. These simulations indicate that GFRMs, by relaxing LTV constraints, increase housing demand by approximately 6.2% relative to the FRM regime; the addition of ARMs, by relaxing both PTI and LTV constraints, raises demand by an additional 6%, for a total of 12.2% with inclusion of all alternatives.
JEL Classification: G21
Suggested Citation: Suggested Citation