The Effects of Adjustable Rate Mortgages on House Price Inflation
Albert S. Davies
This paper examines two important issues regarding house prices and mortgage market activity. First given recent activity in the market regarding adjustable rate mortgages (ARMs), we study the determinants of such mortgages. Our second objective is with regards to a potential simultaneity between house prices and adjustable rate mortgages. If house prices are expected to appreciate, then lenders are less concerned about defaults and may make available more funds to a large extent in the form of ARMs and to lower quality borrowers, for financing the purchase of a house. We investigate this potential feedback relationship using a dynamic panel model for the 48 contiguous states over the years 1986-2010. Fixed effects estimates on the determinants of the share of adjustable rate mortgages are consistent with earlier findings on the importance of the spread, between fixed rate and adjustable rate mortgages. We also find evidence of a possible feedback relationship between house prices and adjustable rate mortgages.
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