NYU Stern

Real Estate And Housing

How Much Does Household Collateral Constrain Regional Risk Sharing?

We construct a new data set of consumption and income data for the largest U.S. metropolitan areas, and we show that the extent of risk-sharing between regions varies substantially over time. In times when US housing collateral is scarce nationally, regional consumption is about twice as sensitive to income shocks. We also document higher sensitivity in regions with lower housing collateral. Household-level borrowing frictions can explain this new stylized fact. When the value of housing relative to human wealth falls, loan collateral shrinks, borrowing (risk-sharing) declines, and the sensitivity of consumption to income increases. Our model aggregates heterogeneous, borrowing-constrained households into regions characterized by a common housing market. The resulting regional consumption patterns quantitatively match those in the data. Read the entire paper here.

Papers

"Mortgage Timing," R. Koijen, Stijn Van Nieuwerburgh, O. van Hemert, Journal of Financial Economics, 2009.

ABSTRACT (Click Here To Open)

We study how the term structure of interest rates relates to mortgage choice, both at the household and the aggregate level. A simple utility framework of mortgage choice points to the long-term bond risk premium as theoretical determinant: when the bond risk premium is high, fixed-rate mortgage payments are high, making adjustable-rate mortgages more attractive. This long-term bond risk premium is markedly different from other term structure variables that have been proposed, including the yield spread and the long yield. We confirm empirically that the bulk of the time variation in both aggregate and loan-level mortgage choice can be explained by time variation in the bond risk premium. This is true whether bond risk premia are measured using forecasters' data, a VAR term structure model, or from a simple household decision rule based on adaptive expectations. This simple rule moves in lock-step with mortgage choice, lending credibility to a theory of strategic mortgage timing by households.

"The Consequences of Mortgage Credit Expansion: Evidence from the 2007 Mortgage Default Crisis," Stijn Van Nieuwerburgh, A. Mian, A. Sufi, 2008.

ABSTRACT (Click Here To Open)

We show that an expansion in the supply of mortgage credit to high latent demand zip codes led to a rapid increase in house prices from 2001 to 2005 and subsequent defaults from 2005 to 2007. From 2001 to 2005, high latent (unfulfilled) demand zip codes experienced relative declines in denial rates and interest rates and relative increases in mortgage credit and house prices, despite the fact that these zip codes experienced negative relative income and employment growth. The growth in securitization was significantly higher in high latent demand zip codes, suggesting a possible role of securitization in credit expansion.

"Mortgages as Recursive Contracts," Stijn Van Nieuwerburgh, J. Krainer , M. Marquis, Econometric Society Winter Meetings, 2004.

ABSTRACT (Click Here To Open)

A recursive contract model of a fixed-rate mortgage contract is presented that captures the history-dependence of the refinancing decision on interest rates and house prices. Simulations of the model illustrate the following properties present in mortgage contracts: (i) mortgages provide rent-risk insurance to households; (ii) mortgage pay-ments and the effective mortgage rate tend to ratchet down over thelife of the contract; and (iii) households may choose to refinance into a lesser-valued contract (with a lower promised value) in order to extract equity from their home.

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