This article accounts for the boom in homeownership from 1994 to 2005 by examining the roles of demographic changes and mortgage innovations. To measure the impact of these factors, we construct a quantitative general equilibrium overlapping generation model with housing. In the long-run, mortgage innovation accounts for between 56 and 70% of the increase whereas demographics account for a much smaller portion. We test this result by considering changes in mortgages after 1940. We find that the introduction of the conventional fixed rate mortgage accounts for at least 50% of the observed increase in homeownership during that period. Copyright � (2009) by the Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

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The objective of this paper is to understand how loan structure a¤ects (i) the borrower's selection of a mortgage contract and (ii) the aggregate economy. We develop a quantitative equilibrium theory of mortgage choice where households can choose from a menu of long-term (nominal) mortgage loans. The model accounts for observed patterns in housing consumption, ownership, and portfolio allocations. We …nd that the loan structure is a quantitatively signi…cant factor in a household's housing …nance decision. The model suggests that the mortgage structure preferred by a household is dependent on age and income and that loan products with low initial payments o¤er an alternative to mortgages with no downpayment. These e¤ects are more important when in ‡ation is low. The presence of in ‡ation reduces the real value of the mortgage payment and the outstanding loan overtime reducing mobility. Changes in the structure of mortgages have implications for risk sharing.