Report

Interest Rates and Equity Extraction During the Housing Boom

Abstract: Using credit record panel data from 1999–2010, we show that the likelihood of home equity extraction (borrowing, on average, about $40,000 against one’s home) peaked in 2003 when mortgage rates hit historic lows, and estimate that a 100 basis point rate decline is associated with a 25 percent rise in the likelihood of extraction. Further, this relationship is amplified in ZIP codes with substantial house price growth. Differential responses to interest rates and home price appreciation by age and credit score provide new evidence of financial frictions. Finally, equity extraction is associated with higher default risk, especially for extractors in 2006 who were more than twice as likely to become delinquent on a mortgage than non-extractors over the next four years.

Bibliographic Information

Provider: Federal Reserve Bank of St. Louis

Part of Series: Community Development Publications and Reports

Publication Date: 2015-07

Pages: 55 pages

Note: The St. Louis Fed Center for Household Financial Stability and the Private Debt Project hosted three "Tipping Points" Household Debt Research Symposia, 2016-2018. All three sessions were centered on the question of "tipping points" in regard to debt: How and when does household debt move from being wealth-building and productive for households and the economy to being wealth-depleting and destructive for both?

Note: Conference Materials: https://fraser.stlouisfed.org/title/tipping-points-i-mapping-understanding-impact-debt-household-financial-well-9372/session-list-685741

Note: Conference Executive Summary: https://fraser.stlouisfed.org/title/tipping-points-i-mapping-understanding-impact-debt-household-financial-well-9372/executive-summary-685740

Note: Tipping Points Conference Series: https://fraser.stlouisfed.org/series/tipping-points-conference-series-9375