The Effect of Interest Rates on Home Buying: Evidence from a Discontinuity in Mortgage Insurance Premiums

Neil Bhutta and Daniel R. Ringo
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Daniel R. Ringo: https://www.federalreserve.gov/econres/daniel-r-ringo.htm

No 2017-086, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.)

Abstract: We study the effect of interest rates on the housing market by taking advantage of a sudden and unexpected price change in a large government mortgage program. The Federal Housing Administration (FHA) insures most mortgages to lower-downpayment, lower credit score borrowers, including a majority of first-time homebuyers. The FHA charges borrowers an annual mortgage insurance premium (MIP), and in January, 2015 the FHA abruptly reduced the MIP, and thus FHA borrowers? effective interest rate, by 50 basis points. Using a regression discontinuity design, we find that the MIP reduction increased the number of home purchase originations among the FHA-reliant population by nearly 14 percent. The response to the premium cut was negatively correlated with borrower income, with no observable response among relatively high income borrowers. We trace part of the jump in home buying to the MIP reduction helping ease binding debt payment-to-income ratio limits thus allowing more applications to be approved. Finally, we find no evidence that the MIP reduction increased house prices.

Keywords: Interest rates; Mortgages and credit; Residential real estate (search for similar items in EconPapers)
JEL-codes: E52 G18 R21 R28 (search for similar items in EconPapers)
Pages: 53 pages
Date: 2017-08-17
New Economics Papers: this item is included in nep-ias, nep-mac and nep-ure
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgfe:2017-86

DOI: 10.17016/FEDS.2017.086

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