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The Interest Rate Elasticity of Mortgage Demand: Evidence from Bunching at the Conforming Loan Limit

Anthony DeFusco and Andrew Paciorek

American Economic Journal: Economic Policy, 2017, vol. 9, issue 1, 210-40

Abstract: This paper provides novel estimates of the interest rate elasticity of mortgage demand by measuring the degree of bunching in response to a discrete jump in interest rates at the conforming loan limit--the maximum loan size eligible for purchase by Fannie Mae and Freddie Mac. The estimates indicate that a 1 percentage point increase in the rate on a 30-year fixed-rate mortgage reduces first mortgage demand by between 2 and 3 percent. One-third of this response is driven by borrowers who take out second mortgages, which implies that total mortgage debt only declines by 1.5 to 2 percent.

JEL-codes: D14 G21 R21 R31 (search for similar items in EconPapers)
Date: 2017
Note: DOI: 10.1257/pol.20140108
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Working Paper: The Interest Rate Elasticity of Mortgage Demand: Evidence From Bunching at the Conforming Loan Limit (2014) Downloads
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Handle: RePEc:aea:aejpol:v:9:y:2017:i:1:p:210-40