Mortgage Timing

Koijen, Ralph S. J.; Van Hemert, Otto; Van Nieuwerburgh, Stijn

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Mortgage Timing

NBER Working Paper No. w13361

53 Pages Posted: 10 Sep 2007 Last revised: 5 Feb 2023

See all articles by Ralph S. J. Koijen

Ralph S. J. Koijen

University of Chicago - Booth School of Business; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Stijn Van Nieuwerburgh

Columbia University Graduate School of Business; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR); ABFER

There are 3 versions of this paper

Date Written: September 2007

Abstract

The fraction of newly-originated mortgages that are of the adjustable-rate (ARM) versus the fixed-rate (FRM) type exhibits a surprising amount of time variation. A simple utility framework of mortgage choice points to the bond risk premium as theoretical determinant: when the bond risk premium is high, FRM payments are high, making ARMs more attractive. We confirm empirically that the bulk of the time variation in household mortgage choice can be explained by time variation in the bond risk premium. This is true regardless of whether bond risk premia are measured using forecasters' data, a VAR term structure model, or a simple rule-of-thumb based on adaptive expectations. This simple rule-of-thumb moves in lock-step with mortgage choice, thereby lending further credibility to a theory of strategic mortgage timing by households.

Suggested Citation: Suggested Citation

Koijen, Ralph S. J. and van Hemert, Otto and Van Nieuwerburgh, Stijn, Mortgage Timing (September 2007). NBER Working Paper No. w13361, Available at SSRN: https://ssrn.com/abstract=1012815