Lara Loewenstein, Federal Reserve Bank of Cleveland
Paul Willen, Federal Reserve Bank of Boston
Yuxi Yao, University of Nebraska-Lincoln
David Zhang, Rice University
Abstract: A recurring question in the mortgage default literature is why underwater default is rare relative to model predictions. We find that one answer is miscalibration of flow payoffs. We build a novel, detailed quantitative model of mortgage default and find that realistic rent dynamics plus mild levels of default costs are sufficient to eliminate negative-equity strategic default. We present further empirical results supporting our model’s focus on flow payoffs. Our model addresses the underwater mortgage defaultpuzzle, offers more realistic interpretations of policy consequences, and reinforces the theoretical effectiveness of cash-flow-based interventions.
Discussant: Anthony DeFusco, University of Wisconsin-Madison
Abstract: This paper investigates the mortgage channel of monetary policy transmission to home purchasing behaviors of first-time home buyers and incumbent homeowners. Between 2009 and 2019, the first-time home buyer share of home purchases fell from 35% to 22%, a period in which mortgage rates fell from nearly 7% to 3.5%. First, I construct a new mortgage rate-specific monetary policy shock to use as an IV for mortgage rate changes which predicts future mortgage rates better than existing monetary policy shocks. Next, I provide empirical evidence for three new findings: 1) transacted house prices respond to monetary policy-induced mortgage rate changes within a matter of weeks, indicating a rapid housing demand response to mortgage rates; 2) a negative 25 basis point mortgage rate shock lowers the first-time buyer share of home purchases by 77 b.p. in the first three months after the shock; 3) these results are more pronounced in areas with higher shares of high LTV-constrained borrowers which tend to be areas with more severe housing crises. Finally, I construct a lifecycle model with a housing ladder, heterogeneous agents, and a system of housing-related taxes calibrated to my empirical findings. I find that a one-time unanticipated negative one p.p. transitory shock to mortgage rates causes potential first-time home buyers to face 0.05% consumption-equivalent welfare losses.
Abstract: This paper reconstructs global housing returns over centuries and presents new stylized facts, by combining archival data with a novel backcasting machine learning approach. Contrary to consensus, housing valuations have been highly dynamic over the long-horizon -- and patterns over recent decades align with deeper trends of rising (excess) returns and prices. Housing lends itself elegantly to a reconstruction of plausible ranges of discount rates over time: I show that discount rates exhibit a clear secular downward trend, parallel to rising housing valuations. The counterpart is a secularly rising "safety premium", the emergence of which I can for the first time document and pinpoint to a specific period (1550-1650): we can thus contextualize rising safety spreads in DM assets over recent years and observe a scarcity of structural breaks, coupled with a persistent trend increase of close to 1 basis point per annum over centuries.
