Interest Rates and Equity Extraction During the Housing Boom
55 Pages Posted: 10 Jan 2014 Last revised: 12 Apr 2017
Date Written: July 29, 2015
Using credit record panel data from 1999-2010, we show that the likelihood of home equity extraction (borrowing, on average, about $40,000 against one's home) peaked in 2003 when mortgage rates hit historic lows, and estimate that a 100 basis point rate decline is associated with a 25 percent rise in the likelihood of extraction. Further, this relationship is amplified in ZIP codes with substantial house price growth. Differential responses to interest rates and home price appreciation by age and credit score provide new evidence of financial frictions. Finally, equity extraction is associated with higher default risk, especially for extractors in 2006 who were more than twice as likely to become delinquent on a mortgage than non-extractors over the next four years.
Keywords: equity extraction, interest rates, monetary policy, credit constraints, mortgages, credit records, household finance
JEL Classification: D12, E52, R20, G21
Suggested Citation: Suggested Citation