Interest Rates and Consumer Choice in the Residential Mortgage Market

Federal Reserve Bank of New York and NYU Stern

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Date Published 2007
Primary Author James Vickery
Other Authors
Theme Mortgage Products


This paper estimates a coefficient of substitution between fixed rate mortgages (FRMs) and adjustable rate mortgages (ARMs), exploiting a discontinuity in legal rules governing the secondary market purchases of Fannie Mae and Freddie Mac. It is found that consumer choice between these mortgage types is strikingly price sensitive: a 20 basis point increase in retail FRM interest rates reduces the FRM market share by 17 percentage points, holding the yield curve and other macroeconomic factors constant. Based on this coefficient, it is calculated that around half of the high FRM share in the US relative to the UK can be accounted for as a consumer response to differences in retail mortgage interest rates.

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