What Calls to ARMs? International Evidence on Interest Rates and the Choice of Adjustable-Rate Mortgages

Cristian Badarinza (), John Campbell and Tarun Ramadorai
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Cristian Badarinza: Department of Real Estate, National University of Singapore, Singapore 117566; Centre for Economic Policy Research, London EC1V 0DX; Institute of Real Estate Studies, Singapore 119613

Management Science, 2018, vol. 64, issue 5, 2275-2288

Abstract: The relative popularity of adjustable-rate mortgages (ARMs) and fixed-rate mortgages (FRMs) varies considerably both across countries and over time. We ask how movements in current and expected future interest rates affect the share of ARMs in total mortgage issuance. Using a nine-country panel and instrumental variables methods, we present evidence that near-term (one-year) rational forecasts of future movements in ARM rates do affect mortgage choice, particularly in more recent data since 2001. However, longer-term (three-year) rational forecasts of ARM rates have a relatively weak effect, and the current spread between FRM and ARM rates also matters, suggesting that households are concerned with current interest costs as well as with lifetime cost minimization. These conclusions are robust to alternative (adaptive and survey-based) models of household expectations.

Keywords: mortgage choice; adjustable rate; fixed rate; household finance (search for similar items in EconPapers)
Date: 2018
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Citations: View citations in EconPapers (37)

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https://doi.org/mnsc.2016.2629 (application/pdf)

Related works:
Working Paper: What Calls to ARMs? International Evidence on Interest Rates and the Choice of Adjustable Rate Mortgages (2014)
Working Paper: What Calls to ARMs? International Evidence on Interest Rates and the Choice of Adjustable-Rate Mortgages (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:64:y:2018:i:5:p:2275-2288

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