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Working Paper
Mortgages as recursive contracts
Mortgages are one-sided contracts under which the borrower may terminate the contract at any time, while the lender must commit to honoring the terms of the contract throughout its life. There are two aspects to this feature of the contract that are modeled in this paper. The first is that the borrower may choose between buying a house or renting. Given these alternatives, a contract between a household and a lender makes home ownership feasible, and provides insurance to the household against fluctuating rental payments. The second is that once in a contract, the household may terminate the ...
Journal Article
Mortgage refinancing
Journal Article
Mortgage choice and the pricing of fixed-rate and adjustable-rate mortgages
In the United States throughout 2009, the share of adjustable-rate mortgages among total mortgage originations was very low, apparently reflecting the attractive pricing of fixed-rate mortgages relative to ARMs. Government policy could have changed the relative attractiveness of the fixed-rate mortgages and ARMs, thereby shifting the market share of these two housing finance instruments. ; This Economic Letter reviews some of the factors determining consumer mortgage choices. It shows that ARM share has declined in ways that parallel the behavior of several key mortgage market interest rates. ...
Journal Article
Why are housing inventories low?
Inventories of homes for sale have been slow to bounce back since the 2007?09 recession, despite steady house price appreciation since January 2012. One probable reason why many homeowners are not putting their homes on the market is that their properties may still be worth less than the value of their mortgages, which would leave them owing additional money after a sale. In other cases, homeowners may simply be hoping that house prices will continue to rise, allowing them to recover lost equity.
Journal Article
Fluctuating fortunes and Hawaiian house prices
Real estate prices in a local market can be driven by an identifiable group of purchasers. In Hawaii, residents of both the U.S. mainland and Japan have been significant purchasers of homes. An analysis suggests that house prices in Hawaii were driven primarily by purchasers from the U.S. mainland for most of the 1975?2008 period. But, during Japan?s ?bubble economy? in the late 1980s and immediately thereafter, house prices in Hawaii were driven primarily by demand from Japan.
Journal Article
House prices and fundamental value
This Economic Letter describes one of the measures commonly used to gauge the fundamental value of housing?the price-rent ratio. We describe the kinds of forces that cause the ratio to move over time and document which forces appear to be most important. We document the way that the housing market typically adjusts to changes in economic fundamentals.
Journal Article
Cap rates and commercial property prices
Commercial real estate capitalization rates have been found to be good indicators of expected returns in commercial properties. Recent declines in these cap rates appear to be signaling a commercial real estate rebound, indicating improved investor expectations of price growth in the market. Movements in national cap rates are the predominant drivers of changes in cap rates in local markets. Therefore, the anticipated commercial real estate rebound is likely to be widespread across many metropolitan areas.
Working Paper
Mortgage default and mortgage valuation
We study optimal exercise by mortgage borrowers of the option to default. Also, we use an equilibrium valuation model incorporating default to show how mortgage yields and lender recovery rates on defaulted mortgages depend on initial loan-to-value ratios when borrowers default optimally. The analysis treats both the frictionless case and the case in which borrowers and/or lenders incur deadweight costs upon default. The model is calibrated using data on California mortgages. We find that the model's principal testable implication for default and mortgage pricing?that default rates and yield ...
Journal Article
Housing markets and demographics
Fifteen years ago, like today, there were concerns that house prices might collapse. One big difference between then and now, however, is the basis for those concerns. Today, people are worried that a house price bubble (if one exists) might burst, while 15 years ago, people were worried about demographic effects, specifically, the inevitable aging of the baby boomers. ; The earlier concern was sparked by a paper by Mankiw and Weil (1989), in which the authors famously predicted that between 1987 and 2007, real house prices could fall by 3% per year. In fact, real house prices grew by an ...
Journal Article
Small business lending patterns in California