The Mortgage Market Meltdown and House Prices

2009 ◽  
Vol 9 (3) ◽  
Author(s):  
R. Glenn Hubbard ◽  
Christopher J Mayer
Keyword(s):  
Interest Rate ◽  
Interest Rates ◽  
House Prices ◽  
Mortgage Market ◽  
Cost Models ◽  
User Cost ◽  
Balance Sheets ◽  
Developed Economies ◽  
Leading Role ◽  
Price Growth

Abstract This paper argues that the U.S. mortgage debacle must be analyzed in the broader setting of global real estate markets. Recent U.S. home price growth closely tracked increases in other developed economies. The analysis distinguishes among market regions in terms of supply elasticity and localized transactions-costs. A series of user-cost models are presented which imply that interest rate fluctuations must figure prominently in any explanation of movements in price/rent ratios. National factors such as the expansion of subprime credit must also be accounted for. The paper concludes with policy prescriptions addressing rapid price declines and elevated interest-rate spreads. We argue that the federal government should play a leading role in helping to reduce interest rates on new mortgages and cushion against underwriting losses on the existing balance sheets of lenders.

scholarly journals Is there a bubble in the Swedish housing market?

2019 ◽  
Vol 12 (1) ◽  
pp. 32-61 ◽  
Author(s):  
Maher Asal
Keyword(s):  
Interest Rates ◽  
Housing Market ◽  
House Prices ◽  
Test Procedure ◽  
Unit Root Test ◽  
Housing Price ◽  
User Cost ◽  
Return To Equilibrium ◽  
Content Type ◽  
Factors Affecting

Purpose This paper aims to investigate the presence of a housing bubble using Swedish data from 1986Q1-2016Q4 by using various methods. Design/methodology/approach First, the authors use affordability indicators and asset-pricing approaches, including the price-to-income ratio, price-to-rent ratio and user cost, supplemented by a qualitative discussion of other factors affecting house prices. Second, the authors use cointegration techniques to compute the fundamental (or long-run) price, which is then compared with the actual price to test the degree of Sweden’s housing price bubble during the studied period. Third, they apply the univariate right-tailed unit root test procedure to capture bursting bubbles and to date-stamp bubbles. Findings The authors find evidence for rational housing bubbles with explosive behavioral components beginning in 2004. These bubbles do not continuously diverge but instead periodically revert to their fundamental value. However, the deviation is persistent, and without any policy correction, it takes decades for real house prices to return to equilibrium. Originality/value The policy implication is that monetary policy designed to contain mortgage demand and thereby prevent burst episodes in the housing market must address external imbalances, as revealed in real exchange rate undervaluation. It is unlikely that current policies will stop the rise of house prices, as the growth of mortgage credit, improvement in Sweden’s international competitiveness and the path of interest rates are much more important factors.

scholarly journals The Relationship between Interest Rates, Income, GDP Growth and House Prices

2017 ◽  
Vol 2 (1) ◽  
pp. 30 ◽  
Author(s):  
Ting Xu
Keyword(s):  
Interest Rate ◽  
Real Estate ◽  
Interest Rates ◽  
House Prices ◽  
Gdp Growth ◽  
The Real ◽  
The Real Estate ◽  
Control Power ◽  
The Relationship

<em>This paper will analyse the relationship between interest rate, income, GDP growth and house prices. First, the control power of interest rate for the prices is limited. Second, people’s income increases, thus that also increases the demand for housing. But house prices are too high and will cause buying pressure. Third, the real estate industry’s growth and GDP growth have inseparable relationship, they interact with each other.</em>

scholarly journals The Effectiveness of the Monetary Transmission Mechanism in Ukraine since the Transition to Inflation Targeting

2019 ◽  
pp. 19-37
Author(s):  
Oleksandr Zholud ◽  
Volodymyr Lepushynskyi ◽  
Sergiy Nikolaychuk
Keyword(s):  
Exchange Rate ◽  
Interest Rate ◽  
Central Bank ◽  
Interest Rates ◽  
Inflation Targeting ◽  
Monetary Transmission ◽  
Interest Rate Policy ◽  
Leading Role ◽  
The Exchange Rate ◽  
The Interest Rate

This paper analyzes the effectiveness of monetary transmission channels in Ukraine since the National Bank of Ukraine (NBU) transitioned to inflation targeting and after the central bank established its new approach to monetary policy implementation. The authors conclude that the central bank has sufficient control over short-term interest rates in the interbank market and that it uses them to influence other financial market indicators. At the same time, further transmission via the interest rate channel is constrained by weak lending and the banking system’s slow post-crisis recovery. The exchange rate channel remains the most powerful avenue of monetary transmission. After the NBU switched to a floating exchange rate and an active interest rate policy, its key rate became a means of influencing exchange rates. The exchange rate channel’s leading role is expected to gradually decrease but remains important, as is typical for small open economies.

scholarly journals Interest Rate Pass-Through: Mortgage Rates, Household Consumption, and Voluntary Deleveraging

2017 ◽  
Vol 107 (11) ◽  
pp. 3550-3588 ◽  
Author(s):  
Marco Di Maggio ◽  
Amir Kermani ◽  
Benjamin J. Keys ◽  
Tomasz Piskorski ◽  
Rodney Ramcharan ◽  
...  
Keyword(s):  
Interest Rates ◽  
House Prices ◽  
Housing Wealth ◽  
Balance Sheets ◽  
Marginal Propensity To Consume ◽  
Marginal Propensity ◽  
Mortgage Rates ◽  
Relative Decline ◽  
Adjustable Rate ◽  
Pass Through

Exploiting variation in the timing of resets of adjustable-rate mortgages (ARMs), we find that a sizable decline in mortgage payments (up to 50 percent) induces a significant increase in car purchases (up to 35 percent). This effect is attenuated by voluntary deleveraging. Borrowers with lower incomes and housing wealth have significantly higher marginal propensity to consume. Areas with a larger share of ARMs were more responsive to lower interest rates and saw a relative decline in defaults and an increase in house prices, car purchases, and employment. Household balance sheets and mortgage contract rigidity are important for monetary policy pass-through. (JEL D12, D14, E43, E52, G21, R31)

scholarly journals Mortgage volume and macroeconomic factors: Evidence from Turkey

2021 ◽  
Vol 9 (4) ◽  
pp. 1504-1520
Author(s):  
Tuğba Güneş ◽  
Ayşen Apaydın
Keyword(s):  
Interest Rates ◽  
House Prices ◽  
Mortgage Market ◽  
Mortgage Loan ◽  
Response Analysis ◽  
Mortgage Loans ◽  
Macroeconomic Factors ◽  
Mortgage Interest ◽  
Mortgage Interest Rates ◽  
Turkish Lira

This paper investigates the impacts of several macroeconomic variables on Turkey's volume of mortgage loans. Johansen cointegration test, vector error correction model, Granger causality tests, variance decomposition, and impulse-response analysis is employed for the econometric analysis to show short and long-run relationships between the variables using time series monthly data from January 2010 to March 2020. Paper results demonstrate that growth of housing credit size negatively correlates with mortgage interest rates, US Dollar/Turkish Lira exchange rate and level of real estate supply. At the same time, there is a positive correlation with house prices. Causal relationships between mortgage volume and macroeconomic indicators are bidirectional for all variables, except for mortgage interest rates. There is a one-way causality relationship from mortgage rates to mortgage loan volume. Econometric analyses show that the recent steep depreciation in the Turkish Lira hurts the Turkish mortgage market. In conclusion, a stable economic environment is essential to build a robust mortgage market.

The Rise in Mortgage Defaults

2009 ◽  
Vol 23 (1) ◽  
pp. 27-50 ◽  
Author(s):  
Christopher Mayer ◽  
Karen Pence ◽  
Shane M Sherlund
Keyword(s):  
Interest Rates ◽  
House Prices ◽  
Mortgage Market ◽  
The Poor ◽  
Main Factors ◽  
Mortgage Defaults

The first hints of trouble in the mortgage market surfaced in mid-2005, and conditions subsequently began to deteriorate rapidly. Mortgage defaults and delinquencies are particularly concentrated among borrowers whose mortgages are classified as “subprime” or “near-prime.” The main factors underlying the rise in mortgage defaults appear to be declines in house prices and deteriorated underwriting standards, in particular an increase in loan-to-value ratios and in the share of mortgages with little or no documentation of income. Contrary to popular perception, the growth in unconventional mortgages products, such as those with prepayment penalties, interest-only periods, and teaser interest rates, does not appear to be a significant factor in defaults through mid-2008 because borrowers who had problems with these products could refinance into different mortgages. However, as markets realized the extent of the poor underwriting, underwriting standards tightened and borrowers began to face difficulties refinancing; this dynamic suggests that these unconventional products could pose problems going forward.

scholarly journals DO INFLATION, INTEREST RATE AND COST OF RENTING AFFECT THE PRICE OF TERRACE HOUSES IN PENANG?

2020 ◽  
Vol 18 (13) ◽  
Author(s):  
Zaemah Zainuddin ◽  
Rosylin Mohd Yusof
Keyword(s):  
Interest Rate ◽  
Interest Rates ◽  
Multivariate Regression ◽  
House Prices ◽  
House Price ◽  
Multivariate Regression Analysis ◽  
Middle Income ◽  
Rental Rate ◽  
Mortgage Rates ◽  
The Cost

In Malaysia, the housing ownership is reported to decrease from 85% in 1999 to 72.5% in 2010. This is due to the outstripped increase of house price over the income level and the unstable economic situation which creates unaffordability to own a house for many people. Therefore, the main objective of this study is to examine whether the price of terrace houses in Penang is being affected with fundamental factors such as inflation, interest rates and the cost of renting. This study uses multivariate regression analysis with quarterly data of terrace house prices (HPI terrace house in Penang), inflation (CPI) and interest rate (mortgage rates) from 2009: Q1 to 2016: Q4. Evidently, the cost of renting terrace houses in Penang does not have any impact on the price of terrace houses and the stable movement of cost of renting indicates that the growth of rental rate is at acceptable price for middle income earners.

scholarly journals The Effects of Monetary Policy on House Prices in Spain: the role of the economic and monetary union membership in the housing bubble prior to the great recession

2018 ◽  
Vol 2 (2) ◽  
pp. 5
Author(s):  
Tibor Pál
Keyword(s):  
Monetary Policy ◽  
Interest Rate ◽  
Interest Rates ◽  
House Prices ◽  
Monetary Transmission ◽  
Interest Rate Policy ◽  
Housing Boom ◽  
Rate Policy ◽  
The Impact

Aim: This paper aims to discover the evolution of monetary transmission in Spain by focusing on the short-term interest rate, credit aggregates and house prices through different stages of economic development and European integration between 1975 and 2008. In addition, the analysis devotes special attention to the interval of the last housing boom, in order to reveal the importance of the interest rate policy of the ECB.Design / Research methods: The study applies a tri-variate autoregressive model assigned to three overlapping periods outlined by regime shifts in the Spanish economy. The estimation output determines the strength and persistency of the links between interest rates, credit aggregates and house prices. Consequently, the results of the econometric analysis provide proper base for comparison in order to identify the dominating channels of monetary transmissions through a prolonged period.Conclusions / findings: It is found that the transmission mechanism in Spain essentially altered over time since 1975. At the beginning of the full analysed interval the role of the credit channel was dominant, then its importance gradually diminished. After the EMU accession the traditional interest rate channel became the leading factor with an intensified and more persistent effect on house prices.Originality / value of the article: While there are numerous researches aimed at estimating the impact of monetary policy on the real economy, empirical studies focusing exclusively on the link between interest rate policy and house prices in Spain are still rare. As the present paper concentrates solely on the Spanish characteristics through extended interval, the study provides country-specific inferences.Implications of the research: Understanding the mechanism of the monetary policy effects on the housing sector is an essential aspect of designing policy interventions aimed at keeping house price development in check.Limitations of the research: Despite the significant results of the empirical analysis, the excessively dynamic increase in the property prices suggests that the factor of irrational expectations also played important role in the latest Spanish housing bubble.Key words: Monetary policy, VAR, ECB, Housing boom, Monetary transmission mechanismJEL: E52, E58.

scholarly journals HOUSING MARKETS, EXPECTATION FORMATION AND INTEREST RATES

2020 ◽  
pp. 1-42
Author(s):  
Carolin Martin ◽  
Noemi Schmitt ◽  
Frank Westerhoff
Keyword(s):  
Interest Rate ◽  
Interest Rates ◽  
Housing Market ◽  
House Prices ◽  
Housing Markets ◽  
Central Banks ◽  
Market Model ◽  
Expectation Formation ◽  
The Interest Rate ◽  
Stock Flow

Based on a behavioral stock-flow housing market model in which the expectation formation behavior of boundedly rational and heterogeneous investors may generate endogenous boom-bust cycles, we explore whether central banks can stabilize housing markets via the interest rate. Using a mix of analytical and numerical tools, we find that the ability of central banks to tame housing markets by increasing the base (target) interest rate, thereby softening the demand pressure on house prices, is rather limited. However, central banks can greatly improve the stability of housing markets by dynamically adjusting the interest rate with respect to mispricing in the housing market.

scholarly journals The Covid-19 Effect on Security Mortgage Valuation

2021 ◽  
Vol 25 (1) ◽  
pp. 13-26
Author(s):  
Giovanna Di Lorenzo ◽  
◽  
Massimiliano Politano ◽  
Keyword(s):  
Interest Rates ◽  
House Prices ◽  
Gompertz Model ◽  
Mortgage Market ◽  
Elderly Persons ◽  
Home Equity ◽  
Reverse Mortgage ◽  
Mortgage Loans ◽  
Alternative Source ◽  
Cir Process

The reverse mortgage market has been expanding rapidly in developed economies in recent years. Reverse mortgages provide an alternative source of funding for retirement income and health care costs. We often hear the phrase “house rich and cash poor” to refer the increasing number of elderly persons who hold a substantial proportion of their assets in home equity. Reverse mortgage contracts involve a range of risks from the insurer’s perspective. When the outstanding balance exceeds the housing value before the loan is settled, the insurer suffers an exposure to crossover risk induced by three risk factors: interest rates, house prices, and mortality rates. In this context, Covid-19 has occurred and the insurer is faced with this additional source of risk. We analyse the combined impact of these risks on the pricing and the risk profile of reverse mortgage loans. We consider a CIR process for the evolution of the interest rate, a Black & Scholes model for the dynamics of house prices and the Gompertz model for the trend in mortality Our results show that the decrease in the mortality curve due to Covid exposes the insurer to higher risks once the shock is reabsorbed. The risk is higher the higher the age of entry. Only a significant reduction of the shock adjustment coefficient will return the situation to normality.

Sign in / Sign up

Export Citation Format

Share Document