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House Prices, Mortgages, and Monetary Policy

Paper Session

Sunday, Jan. 6, 2019 8:00 AM - 10:00 AM

Atlanta Marriott Marquis, A706
Hosted By: American Economic Association
  • Chair: Emi Nakamura, University of California-Berkeley

State Dependency and the Efficacy of Monetary Policy: The Refinancing Channel

Arlene Wong
,
Princeton University
Sergio Rebelo
,
Northwestern University, NBER, and CEPR
Martin Eichenbaum
,
Northwestern University and NBER

Abstract

This paper studies how the impact of monetary policy depends on the distribution of savings from refinancing mortgages. We show that the efficacy of monetary policy is state dependent, varying in a systematic way with the pool of potential savings from refinancing. We construct a quantitative dynamic lifecycle model that accounts for our findings. Motivated by the rapid expansion of Fintech, we study the impact of a fall in refinancing costs on the efficacy of monetary policy. Our model implies that as refinancing costs decline, the effects of monetary policy become less state dependent and more powerful.

Rental Markets and the Effect of Credit Conditions on House Prices

Adam Guren
,
Boston University
Daniel Greenwald
,
Massachusetts Institute of Technology
Joseph Vavra
,
University of Chicago

Abstract

To what extent did an expansion and contraction of credit drive the housing boom and bust? Papers such as Favilukis, Ludvigson, and Van Nieuwerburgh (2017) and Justiniano, Primiceri, and Tambalotti (2015) argue that credit conditions can explain essentially all of the movements in house prices in the 2000s, while others such as Kaplan, Mitman, and Violante (2017) argue that credit conditions explain none of the boom and bust. The key difference is in how these papers model the rental market: the former model perfect segmentation between the rental and owner-occupied stocks, while the latter model complete integration and conversion by deep-pocketed investors. The importance of credit for house prices thus hinges on how one models the rental market. In this paper, we introduce a dynamic equilibrium model with household and housing stock heterogeneity that nests both extremes. Our model provides a simple, supply-and-demand interpretation of these seemingly divergent results. We structurally estimate our model to evaluate how rental markets should be modeled and consequently how important credit is for housing cycles.

No Job, No Money, No Refi: Frictions to Refinancing in a Recession

John Mondragon
,
Northwestern University
Anthony DeFusco
,
Northwestern University

Abstract

We study how employment documentation requirements and out-of-pocket closing costs constrain mortgage refinancing. These frictions, which bind most severely during recessions, may significantly inhibit monetary policy pass-through. To study their effects on refinancing, we exploit an FHA policy change that excluded unemployed borrowers from refinancing and increased others’ out-of-pocket costs substantially. These changes dramatically reduced refinancing rates, particularly among the likely unemployed and those facing new out-of-pocket costs. Our results imply that unemployed and liquidity-constrained borrowers have a high latent demand for refinancing. Cyclical variation in these factors may therefore affect both the aggregate and distributional consequences of monetary policy.

Mortgage Prepayment and Path-Dependent Effects of Monetary Policy

Konstantin Milbradt
,
Northwestern University and NBER
Fabrice Tourre
,
Copenhagen Business School
David Berger
,
Northwestern University

Abstract

The fixed rate mortgage, prepayable at the option of the homeowner, is the dominant household debt contract in the U.S. We develop a theory linking short term interest rates to mortgages rates in an environment where households are inattentive and thus behave sub-optimally. We characterize not only the behavior of mortgage rates across interest rate environments, but also how the mortgage coupon distribution in the population is expected to vary over time, based on interest rate movements and prepayments. Our analytical solution allows for a range of comparative static results that can be readily taken to the data. Our theory has implications for the transmission of U.S. monetary policy via the mortgage market through the prepayment channel. Finally, we show how our model apparatus can be transported into larger macro models to study dynamic responses to interest rate shocks in environments where mortgage debt is prepayable.
Discussant(s)
Joseph Vavra
,
University of Chicago
Christopher Palmer
,
Massachusetts Institute of Technology
Benjamin Keys
,
University of Pennsylvania and NBER
Monika Piazzesi
,
Stanford University and NBER
JEL Classifications
  • E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit
  • G1 - General Financial Markets