## wpiea2023001-print-pdf - 0.752 percent (since both variables are in logs, this coefficient represents the elasticity; see ## Source details **Canonical URL:** [wpiea2023001-print-pdf - 0.752 percent (since both variables are in logs, this coefficient represents the elasticity; see](https://www.imf.org/-/media/files/publications/wp/2023/english/wpiea2023001-print-pdf.pdf) ## Other formats - [Markdown version](/-/media/files/publications/wp/2023/english/wpiea2023001-print-pdf.pdf.md) - [Structured JSON version](/-/media/files/publications/wp/2023/english/wpiea2023001-print-pdf.pdf.json) --- ### Key empirical finding: Pricing-out effect on first-time homebuyers - A 1 percent increase in MSA-level house prices is associated with a 0.752 percent increase in the income of first-time homebuyers (coefficient interpreted as an elasticity because both variables are in logs). - Interpretation: after controlling for the quality of the house purchased relative to a typical MSA house, the coefficient represents the increase in income of first-time homebuyers purchasing a typical type of house following an increase in house prices. - Mechanisms: - “Involuntary” pricing-out: higher MSA-wide house prices raise required mortgage balances and debt servicing costs, pushing some previously qualifying households into violation of DTI constraints. - “Voluntary” pricing-out: some households opt to continue renting or buy smaller houses after price surges, so households who still buy the same-size house have higher incomes. - The paper documents the existence of a pricing-out effect but does not take a stance on whether the pricing-out is involuntary or voluntary. ### Comparison of mortgage-rate (interest-payment) effect versus pricing-out effect - MSA-level mortgage rate at loan origination: a one-percentage-point decrease in the MSA-level mortgage rate is associated with a 7.5 percent decrease in the income of first-time homebuyers (dependent variable in log; independent in levels → semi-elasticity). - Offset calculation: because 1 percent increase in house prices → 0.752 percent increase in required income, a one-percentage-point decrease in the mortgage rate (7.5 percent income decrease) would be fully offset if house prices increase by 10.0 percent (i.e., 7.5/0.752). - Historical example (Nov 2018 to Dec 2021): - Mortgage rates declined by 1.77 percentage points (from 4.87 percent to 3.10 percent). - U.S. Zillow house price index increased by 34.8 percent. - Regression implications (Table 1, Column (1)): - Interest-payment channel: first-time homebuyers’ income would decrease by roughly 13.3 percent (7.5 × 1.77 percent). - Pricing-out channel: first-time homebuyers’ income would increase by roughly 26.2 percent (0.752 × 34.8 percent). - Conclusion: during this monetary easing episode, the general-equilibrium pricing-out effect was about twice as large as the partial-equilibrium interest-payment effect. ### Robustness and alternative specifications - Controlling for MSA fixed effects and additional factors (including household-level FICO score and number of establishments in the MSA) yields quantitatively similar pricing-out estimates for first-time buyers. - Column (3) of Table 1: the one-percentage-point mortgage rate decrease effect is 7.0 percent; pricing-out offset implied at about 10 percent (i.e., 7.0/0.686). - Using household-level mortgage rates reduces the estimated interest-payment effect: - A one percent increase in house prices remains associated with about a 0.7 percent increase in first-time homebuyer income. - A one-percentage-point decrease in the mortgage rate is associated with only a 4–5 percent decrease in income when using household-level rates (Table 4). - Clustering standard errors at the MSA level does not change significance levels; Hypothesis 2 (pricing-out stronger for first-time buyers) still holds (Table 5). ### Findings on repeat homebuyers and heterogeneity - Pricing-out effect exists for repeat homebuyers but is weaker than for first-time homebuyers. - Example comparisons (based on first-column coefficients of Tables 1 and 2): - Scenario A: interest rate decreases by 1 percentage point and housing price increases by 18 percent (actual year-on-year U.S. housing price change in May 2022): - Repeat homebuyers’ median income change = 7.4×(-1) + 0.700×18 = 5.20 percent. - First-time homebuyers’ median income change = 7.5×(-1) + 0.752×18 = 6.04 percent. - Difference = 0.84 percentage points, which is 16 percent (0.84/5.20) of the percent change in median income of repeat homebuyers. - Scenario B: interest rate decreases by 1 percentage point and housing price increases by 10 percent: - Repeat homebuyers’ median income change = 7.4×(-1) + 0.700×10 = -0.40 percent (improved affordability). - First-time homebuyers’ median income change = 7.5×(-1) + 0.752×10 = 0.02 percent (slight deterioration). - Under some scenarios, median incomes of first-time and repeat homebuyers can move in opposite directions. - Interaction regressions (Table 3): an interaction between log MSA-level house price and a first-time-buyer dummy is positive and statistically significant across specifications → pricing-out effect is stronger for first-time buyers. ### Additional control-variable findings - Income of a typical first-time homebuyer is positively associated with: - Higher house size purchased by the household. - Higher average wage in the MSA. - Post-GFC period (consistent with tougher lending standards). - Higher household FICO score. - The coefficient on the number of establishments in the MSA is counterintuitive; possible measurement issues or multicollinearity with similar variables (average wage and employment). ### Policy implications and recommendations - Monetary easing involves a trade-off: - Direct effect: lower mortgage payments improve housing affordability. - General-equilibrium effect: higher house prices can price out potential buyers and reduce affordability. - Pricing-out effect is stronger for first-time homebuyers than for existing homeowners, increasing housing wealth inequality. - A one-percentage-point decrease in the mortgage rate is offset if house prices increase by about 10 percent. - Policy guidance: - Complement expansionary monetary policy with well-targeted measures to mitigate deterioration in housing affordability for first-time and lower-income homebuyers. - When implementing contractionary monetary policy, account for potential mitigating effects of lower house prices over time; avoid slowing monetary tightening solely on affordability concerns, but provide short-term targeted measures to address immediate affordability losses. - Take region-specific approaches because housing demand and supply elasticities vary across areas and affect how house prices respond to monetary policy. - Targeted, temporary measures should be used to boost affordability for first-time and lower-income homebuyers in both easing and tightening episodes; if tightening aims to reduce inflation, such measures should ideally be budget-neutral to avoid intensifying inflationary pressure. - Examples of policy measures discussed: - Demand-side: first-time homebuyer tax credit (FHTC) — historical evidence: FHTC increased first-time homebuyer purchases by 16.0 percent between April 2008 and September 2010, with larger effects in areas with lower home values and no measurable effect on mortgage delinquencies. - Supply-side: Low-Income Housing Tax Credit (LIHTC) — targeted to households with incomes below or at 60 percent of MSA median income; HUD report: 44.4 percent of LIHTC households have annual incomes of less than 30 percent of MSA median income; median LIHTC household income = $17,943. - Other demand-side measures: targeted housing vouchers/subsidies, grants, tax relief, accommodative financing, targeted financing and guarantee mechanisms. - Supply-side measures: freeing up land supply, improving planning/zoning, increasing social housing stock (requires careful cost-benefit analysis versus housing allowances). - Caution: demand-side measures that simply increase households’ borrowing capacity may raise housing prices and offset intended affordability gains. ### Limitations and avenues for future research - Focus is on affordability of owning rather than renting, and on distributional implications between first-time and existing homeowners. - Theoretical model is stylized; extending analysis to richer and dynamic frameworks is suggested. - Empirical approach quantifies the magnitude of house price effects relative to interest rate effects but does not aim to identify the causal effect of monetary policy changes on house prices and housing inequality — a promising avenue for future research. ### Appendix Figure 1. Housing Affordability in Terms of Housing Quality - Figure is an equivalent presentation of Figure 4 in the main text, plotting homebuyers’ income instead of housing quality. - Solid lines: housing demand curves when the interest rate is high. - Dashed lines: housing demand curves when the interest rate is low. - FT = First-time Homebuyers; R = Repeat Homebuyers; p = Housing Price. - The vertical line represents the housing supply. - Interpretation of coefficients: - β1 (log house price coefficient): both income (LHS) and house prices (RHS) are in logs; β1 interpreted as an elasticity. Empirical implication: a one percent increase in house prices is associated with an increase in the income of first-time buyers of β1 percent. Estimated magnitude reported: around 0.7 percent. - β3 (MSA-level mortgage origination rate coefficient): income on LHS in logs, mortgage origination rate on RHS in levels (percentage points); β3 is a semi-elasticity. Empirical implication: a one percentage point increase in the mortgage rate is associated with an increase in the income of first-time buyers by β3, or equivalently by 100*β3 percent. Estimated magnitude reported: around 7 percent. - Appendix tables report pricing-out effects for first-time and repeat homebuyers, with variants including household-level mortgage rates, interaction terms, and clustered standard errors. - Statistical significance notation used in tables: *** p<0.01, ** p<0.05, * p<0.1. - Data sources for tables and calculations: Freddie Mac; Zillow; BLS; Authors’ calculations. *wpiea2023001-print-pdf - 0.752 percent (since both variables are in logs, this coefficient represents the elasticity; see* ### 0.752 percent (since both variables are in logs, this coefficient represents the elasticity; see ### wpiea2023001-print-pdf - 0.752 percent (since both variables are in logs, this coefficient represents the elasticity; see ### Key empirical finding: Pricing-out effect on first-time homebuyers - A 1 percent increase in MSA-level house prices is associated with a 0.752 percent increase in the income of first-time homebuyers (coefficient interpreted as an elasticity because both variables are in logs). - Interpretation: after controlling for the quality of the house purchased relative to a typical MSA house, the coefficient represents the increase in income of first-time homebuyers purchasing a typical type of house following an increase in house prices. - Mechanisms: - “Involuntary” pricing-out: higher MSA-wide house prices raise required mortgage balances and debt servicing costs, pushing some previously qualifying households into violation of DTI constraints. - “Voluntary” pricing-out: some households opt to continue renting or buy smaller houses after price surges, so households who still buy the same-size house have higher incomes. - The paper does not take a stance on whether the pricing-out is involuntary or voluntary, but documents the existence of a pricing-out effect. ### Comparison of mortgage-rate (interest-payment) effect versus pricing-out effect - MSA-level mortgage rate at loan origination: a one-percentage-point decrease in the MSA-level mortgage rate is associated with a 7.5 percent decrease in the income of first-time homebuyers (dependent variable in log; independent in levels → semi-elasticity). - Offset calculation: because 1 percent increase in house prices → 0.752 percent increase in required income, a one-percentage-point decrease in the mortgage rate (7.5 percent income decrease) would be fully offset if house prices increase by 10.0 percent (i.e., 7.5/0.752). - Historical example (Nov 2018 to Dec 2021): - Mortgage rates declined by 1.77 percentage points (from 4.87 percent to 3.10 percent). - U.S. Zillow house price index increased by 34.8 percent. - Regression implications (Table 1, Column (1)): - Interest-payment channel: first-time homebuyers’ income would decrease by roughly 13.3 percent (7.5 × 1.77 percent). - Pricing-out channel: first-time homebuyers’ income would increase by roughly 26.2 percent (0.752 × 34.8 percent). - Conclusion: during this monetary easing episode, the general-equilibrium pricing-out effect was about twice as large as the partial-equilibrium interest-payment effect. ### Robustness and alternative specifications - Controlling for MSA fixed effects and additional factors (including household-level FICO score and number of establishments in the MSA) yields quantitatively similar pricing-out estimates for first-time buyers. - Column (3) of Table 1: the one-percentage-point mortgage rate decrease effect is 7.0 percent; pricing-out offset implied at about 10 percent (i.e., 7.0/0.686). - Using household-level mortgage rates reduces the estimated interest-payment effect: - A one percent increase in house prices remains associated with about a 0.7 percent increase in first-time homebuyer income. - A one-percentage-point decrease in the mortgage rate is associated with only a 4–5 percent decrease in income when using household-level rates (Table 4). - Clustering standard errors at the MSA level does not change significance levels; Hypothesis 2 (pricing-out stronger for first-time buyers) still holds (Table 5). ### Findings on repeat homebuyers and heterogeneity - Pricing-out effect exists for repeat homebuyers but is weaker than for first-time homebuyers. - Example comparisons (based on first-column coefficients of Tables 1 and 2): - Scenario A: interest rate decreases by 1 percentage point and housing price increases by 18 percent (actual year-on-year U.S. housing price change in May 2022): - Repeat homebuyers’ median income change = 7.4×(-1) + 0.700×18 = 5.20 percent. - First-time homebuyers’ median income change = 7.5×(-1) + 0.752×18 = 6.04 percent. - Difference = 0.84 percentage points, which is 16 percent (0.84/5.20) of the percent change in median income of repeat homebuyers. - Scenario B: interest rate decreases by 1 percentage point and housing price increases by 10 percent: - Repeat homebuyers’ median income change = 7.4×(-1) + 0.700×10 = -0.40 percent (improved affordability). - First-time homebuyers’ median income change = 7.5×(-1) + 0.752×10 = 0.02 percent (slight deterioration). - Under some scenarios, median incomes of first-time and repeat homebuyers can move in opposite directions. - Interaction regressions (Table 3): an interaction between log MSA-level house price and a first-time-buyer dummy is positive and statistically significant across specifications → pricing-out effect is stronger for first-time buyers. ### Additional control-variable findings - Income of a typical first-time homebuyer is positively associated with: - Higher house size purchased by the household. - Higher average wage in the MSA. - Post-GFC period (consistent with tougher lending standards). - Higher household FICO score. - The coefficient on the number of establishments in the MSA is counterintuitive; possible measurement issues or multicollinearity with similar variables (average wage and employment). ### Policy implications and recommendations - Monetary easing involves a trade-off: - Direct effect: lower mortgage payments improve housing affordability. - General-equilibrium effect: higher house prices can price out potential buyers and reduce affordability. - Pricing-out effect is stronger for first-time homebuyers than for existing homeowners, increasing housing wealth inequality. - A one-percentage-point decrease in the mortgage rate is offset if house prices increase by about 10 percent. - Policy guidance: - Complement expansionary monetary policy with well-targeted measures to mitigate deterioration in housing affordability for first-time and lower-income homebuyers. - When implementing contractionary monetary policy, account for potential mitigating effects of lower house prices over time; avoid slowing monetary tightening solely on affordability concerns, but provide short-term targeted measures to address immediate affordability losses. - Take region-specific approaches because housing demand and supply elasticities vary across areas and affect how house prices respond to monetary policy. - Targeted, temporary measures should be used to boost affordability for first-time and lower-income homebuyers in both easing and tightening episodes; if tightening aims to reduce inflation, such measures should ideally be budget-neutral to avoid intensifying inflationary pressure. - Examples of policy measures discussed: - Demand-side: first-time homebuyer tax credit (FHTC) — historical evidence: FHTC increased first-time homebuyer purchases by 16.0 percent between April 2008 and September 2010, with larger effects in areas with lower home values and no measurable effect on mortgage delinquencies. - Supply-side: Low-Income Housing Tax Credit (LIHTC) — targeted to households with incomes below or at 60 percent of MSA median income; HUD report: 44.4 percent of LIHTC households have annual incomes of less than 30 percent of MSA median income; median LIHTC household income = $17,943. - Other demand-side measures (from referenced literature): targeted housing vouchers/subsidies, grants, tax relief, accommodative financing, targeted financing and guarantee mechanisms. - Supply-side measures: freeing up land supply, improving planning/zoning, increasing social housing stock (requires careful cost-benefit analysis versus housing allowances). - Caution: demand-side measures that simply increase households’ borrowing capacity may raise housing prices and offset intended affordability gains. ### Limitations and avenues for future research - Focus is on affordability of owning rather than renting, and on distributional implications between first-time and existing homeowners. - Theoretical model is stylized; extending analysis to richer and dynamic frameworks is suggested. - Empirical approach quantifies the magnitude of house price effects relative to interest rate effects but does not aim to identify the causal effect of monetary policy changes on house prices and housing inequality — a promising avenue for future research. *Italic source attribution: wpiea2023001-print-pdf - 0.752 percent (since both variables are in logs, this coefficient represents the elasticity; see* ### Appendix Figure 1. Housing Affordability in Terms of Housing Quality ### Appendix Figure 1. Housing Affordability in Terms of Housing Quality ### Figure description and conceptual interpretation - The figure is an equivalent presentation of Figure 4 in the main text, plotting homebuyers’ income instead of housing quality. - Solid lines: housing demand curves when the interest rate is high. - Dashed lines: housing demand curves when the interest rate is low. - FT = First-time Homebuyers; R = Repeat Homebuyers; p = Housing Price. - The vertical line represents the housing supply. ### Interpretation of the (log) MSA-level house price coefficient (β1) - Both income (left-hand side) and house prices (right-hand side) are in logs; the coefficient β1 is interpreted as an elasticity. - Empirical implication from the regression: a one percent increase in house prices is associated with an increase in the income of first-time buyers of β1 percent. - Estimated magnitude reported: around 0.7 percent. ### Interpretation of the MSA-level mortgage origination rate coefficient (β3) - Income on the left-hand side is in logs, while the mortgage origination rate on the right-hand side is in levels (percentage points); the coefficient β3 is a semi-elasticity. - Empirical implication from the regression: a one percentage point increase in the mortgage rate (for example, from 2 percent to 3 percent) is associated with an increase in the income of first-time buyers by β3, or equivalently by 100*β3 percent. - Estimated magnitude reported: around 7 percent. ### Notes on appended tables and estimation reporting - Appendix tables report pricing-out effects for first-time and repeat homebuyers, with variants including household-level mortgage rates, interaction terms, and clustered standard errors. - Statistical significance notation used in tables: *** p<0.01, ** p<0.05, * p<0.1. - Data sources for tables and calculations: Freddie Mac; Zillow; BLS; Authors’ calculations. *Source: Authors.* --- _Source: https://www.imf.org/-/media/files/publications/wp/2023/english/wpiea2023001-print-pdf.pdf_