Summary of The Interest Rate Elasticity of Mortgage Demand

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The Interest Rate Elasticity of Mortgage Demand summary

Editorial Rating

7

Qualities

  • Innovative

Recommendation

Most modern economies depend, to varying degrees, on the housing industry to generate growth. While reckless government promotion of home ownership can cause excesses such as those that happened in the United States, Spain and Ireland leading up to the 2008 housing bust, overly cautious policies can dampen economic development. As officials tweak the rules on mortgages to thwart prerecession extremes, it is important to understand how the costs of new regulations affect the housing and debt markets. While this paper may try too hard to find more answers than the data might bear, getAbstract applauds its bold attempt at addressing tough questions.

About the Authors

Anthony A. DeFusco is a doctoral student at The Wharton School. Andrew Paciorek is an economist with the Board of Governors of the Federal Reserve System.

Summary

The difficulty in analyzing mortgage borrowing is that while interest rates change over time, other factors that influence borrowing also vary. However, a quirk in the US mortgage market allows researchers to estimate the elasticity of mortgage demand – that is, the extent to which the amount of mortgage borrowing varies – in response to changes in interest rates.

Fannie Mae and Freddie Mac, two US government-sponsored enterprises (GSEs), can purchase mortgages up to a certain size (“the conforming loan limit,” which reached $420,000 in...


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