Inequality and housing prices
In an environment of rising income inequality and low real rates, how are house prices, mortgage debt and deliquencies impacted? This is the question that Sevim Kösem is trying to answer in this paper. For his empirical analysis he uses the Gini coefficient, population, mean household income, number of households from the U.S. Census and the American Community Surveys conducted in 1990, 2000, 2011 and 2016. He finds that a one percentage increase in the Gini coefficient leads to 2.2% decline in real house prices, 0.34 percentage point increase in the share of delinquent mortgages, and 1.4 % decline in real mortgage debt per capita. He also develops a general equilibrium model with heterogeneous income households who borrow to finance the purchase of a house. Rising inequality and declining real rates are exogenous. He concludes:
[I]n isolation, rising income inequality is associated with declines in real house prices and mortgage debt, but a rise in mortgage delinquencies. The key theoretical mechanism is that households with heterogeneous incomes are offered a menu of mortgage contracts with different default risk. A rise in income inequality alters the borrower pool for the worse – a higher share of borrowers find it optimal to select into high risk loans, borrow costly and demand for housing is depressed. These borrowers also have high propensity to borrow against their income and when a smaller share of income is allocated to them, average propensity to borrow and thus aggregate mortgage debt declines.
Income inequality, mortgage debt and house prices
Author: Sevim Kösem
From: Bank of England
Race and mortgage rates
In 2012, according to Gerardi et al., Black borrowers with mortgages insured by Fannie Mae or Freddie Mac paid interest rates that were approximately 60 basis points higher than those paid by Non-Hispanic white borrowers. What accounted for this gap? This is the question that Gerardi et al. are trying to answer in this paper. They use a novel data set that combines three sources of administrative data: Home Mortgage Disclosure Act (HMDA) data, Black Knight McDash mortgage servicing data, and credit bureau data from Equifax. The loans included in the dataset were originated during the period from 2005 to 2015, while data on loan performance extends through June 2020. They find that:
[M]inority borrowers refinance their fixed-rate mortgages at a significantly lower rate compared with non-Hispanic white borrowers, and that expansionary monetary policy appears to have exacerbated these differences. In turn, the large differences in refinance propensities have resulted in significant disparities in the average interest rate that minority borrowers pay on the stock of outstanding mortgages compared with their non-Hispanic white counterparts. These differences in the stock of rates are much larger in magnitude than the corresponding differences in the rates paid on newly originated loans.
Mortgage Prepayment, Race, and Monetary Policy
Authors: Kristopher Gerardi, Paul Willen, David Hao Zhang
From: Federal Reserve Bank of Atlanta, Federal Reserve Bank of Boston, Harvard University
