Houses as ATMs: Mortgage Refinancing and Macroeconomic Uncertainty

Hui Chen · Michael Michaux · Nikolai L. Roussanov

110 citations0/0 files storedThe Journal of Finance

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Housing Market and Economics Financial Literacy, Pension, Retirement Analysis Economic theories and models

Abstract

ABSTRACT Mortgage refinancing activity associated with extraction of home equity contains a strongly countercyclical component consistent with household demand for liquidity. We estimate a structural model of liquidity management featuring countercyclical idiosyncratic labor income uncertainty, long‐ and short‐term mortgages, and realistic borrowing constraints. We empirically evaluate its predictions for households' choices of leverage, liquid assets, and mortgage refinancing using microlevel data. Taking the observed historical paths of house prices, aggregate income, and interest rates as given, the model accounts for many salient features in the evolution of balance sheets and consumption in the cross‐section of households over 2001 to 2012.

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References

1997Golden Eggs and Hyperbolic Discounting 1989Substitution, Risk Aversion, and the Temporal Behavior of Consumption and Asset Returns: A Theoretical Framework 2010The Geographic Determinants of Housing Supply *2002Consumption Over the Life Cycle 1988Intertemporal Substitution in Consumption 2013Household Balance Sheets, Consumption, and the Economic Slump*1996Asset Pricing with Heterogeneous Consumers 2011House Prices, Home Equity–Based Borrowing, and the US Household Leverage Crisis

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