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Working Paper 22-04: Effects of Mortgage Interest Rates on House Price Appreciation: The Role of Payment Constraints

Published: 11/17/2022
Author:

​​William Larson

​Abstract: This research examines the effects of mortgage interest rates on house prices in the 100 largest U.S. cities, with appreciation driven by both short-run dynamics and convergence towards long-run economic fundamentals.  The nature of the long-run equilibrium depends on the elasticity of housing supply, and the speed of adjustment to this long-run equilibrium depends on the degree to which borrowers are near monthly debt service payment constraints. Accordingly, the pass-through of mortgage interest rates to house prices is location and time-varying. This has implications for our understanding of monetary policy transmission, systemic risk, and the role of household finances in the macroeconomy.

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