The Interest Rate Elasticity of Mortgage Demand: Evidence from Bunching at the Conforming Loan Limit
This paper provides novel estimates of the interest rate elasticity of mortgage demand by measuring the degree of bunching in response to a discrete jump in interest rates at the conforming loan limit—the maximum loan size eligible for purchase by Fannie Mae and Freddie Mac. The estimates indicate that a 1 percentage point increase in the rate on a 30 year fixed-rate mortgage reduces first mortgage demand by between 2 and 3 percent. One third of this response is driven by borrowers who take out second mortgages, which implies that total mortgage debt only declines by 1.5 to 2 percent.
DeFusco, Anthony and Andrew Paciorek. 2017. The Interest Rate Elasticity of Mortgage Demand: Evidence from Bunching at the Conforming Loan Limit. American Economic Journal: Economic Policy. 9(1): 210-240.