Interest Rates and the Distribution of House Prices

Abstract

How do interest rates affect the distribution of house prices? I develop a housing assignment framework and exploit incidental differences in the income distribution to identify the model. A one percentage point decline in mortgage rates causes a 6% contemporaneous increase in home values in middle-priced neighborhoods. High-priced neighborhoods experience half of this increase, while low-priced neighborhoods exhibit no change. Mortgage applications exhibit a similar pattern. The results also underscore the persistence of interest rate shocks. The rate shocks in between Jul-2000 and Dec-2001 account for a significant amount of price variation in middle-priced neighborhoods during the 2000s housing boom.

Keywords: Interest rates, housing prices, mortgage rates, housing wealth, housing demand, monetary policy

JEL Classification: E52, D14, D31, E21, R21, R31