Interest Rate Pass-Through: Mortgage Rates, Household Consumption, and Voluntary Deleveraging

Abstract

Exploiting variation in the timing of resets of adjustable-rate mortgages (ARMs), we find that a sizable decline in mortgage payments (up to 50 percent) induces a significant increase in car purchases (up to 35 percent). This effect is attenuated by voluntary deleveraging. Borrowers with lower incomes and housing wealth have significantly higher marginal propensity to consume. Areas with a larger share of ARMs were more responsive to lower interest rates and saw a relative decline in defaults and an increase in house prices, car purchases, and employment. Household balance sheets and mortgage contract rigidity are important for monetary policy pass-through. (JEL D12, D14, E43, E52, G21, R31)There has been a long-standing debate among economists regarding the effects of interest rates on the real economy (e.g., Bernanke and Gertler 1995). During the Great Recession, the Federal Reserve substantially reduced the overnight lending rate target and made large purchases of mortgage-backed securities in an attempt to stimulate household spending and support the prices of assets such as houses. This paper exploits this setting to explore how changes in interest rates impact the real economy. It establishes the effects of lower mortgage rates on adjustable-rate * Di Maggio: Harvard Business School, Baker Library 265,

Unemployment Insurance as a Housing Market Stabilizer

“…Di Maggio et al (2017) find that a 20 percent reduction in mortgage payment (and payment-to-income ratio) results in an 11 percent decline in mortgage delinquency within one year; Fuster and Willen (2017) find that a 50 percent decline in mortgage payment results in a 55 percent decline in delinquency. For the median displaced worker, then, we would expect the delinquency rate to decrease by 18 percent (i.e., 0.33 × 0.11/0.20; Di Maggio et al estimate) to 36 percent (i.e., 0.33 × 0.55/0.50; Fuster and Willen estimate).…”

Household Debt Overhang and Transmission of Monetary Policy

“…For instance, Beraja et al (2015) use loan-level data from the United States to show that the expansionary effects of monetary policy following the financial crisis were weaker in U.S. states where house prices were more depressed, attributing this to the weakening of the refinancing channel when home equity levels are low. 6 Other examples of studies employing microdata and focusing primarily on the Great Recession include Bhutta and Keys (2016) and Di Maggio et al (2016Maggio et al ( , 2017. In this paper, we analyze the role of household indebtedness in the transmission 3.…”

How Much Are Car Purchases Driven by Home Equity Withdrawal?

“…DiMaggio et al. () find a stronger response for homeowners with lower incomes and higher loan‐to‐value ratios. Other examples of predicable changes in income that appear to affect car sales contemporaneously include tax refunds (Souleles , Adams, Einav, and Levin ); economic stimulus payments (Parker et al.…”

“…Some studies demonstrate this sensitivity by using changes in mortgage market conditions, which affect the income that is available for nonhousing purchases. For example, Agarwal et al (2017) and DiMaggio et al (2017) find an increase in auto loan originations after a drop in household mortgage payments due to the Home Affordable Modification Program and mortgage rate resets, respectively. DiMaggio et al (2017) find a stronger response for homeowners with lower incomes and higher loan-to-value ratios.…”