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Home Is Where the Equity Is: Mortgage Refinancing and Household Consumption

Erik Hurst () and Frank Stafford

Journal of Money, Credit and Banking, 2004, vol. 36, issue 6, 985-1014

Abstract: Applying a permanent income model with exogenous liquidity constraints and mortgage behavior, household refinancing when mortgage interest rates are historically high and rising, a persistent empirical puzzle, is explained. Using data from the Panel Study of Income Dynamics, households experiencing an unemployment shock and having limited initial liquid assets to draw upon are shown to have been 25% more likely to refinance, 1991-94. On average, such liquidity-constrained households converted over two-thirds of every dollar of equity they removed into current consumption as mortgage rates plummeted, 1991-94, producing an estimated expenditure stimulus of at least $28 billion.

Date: 2004
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Journal of Money, Credit and Banking is currently edited by Robert deYoung, Paul Evans, Pok-Sang Lam and Kenneth D. West

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