Mortgage Demand Goes Hand-In-Hand With Mortgage Interest Rates

Stephanie Lo of the Harvard Joint Center for Housing Studies writes that the post-recession drop in housing demand is partly due to an increase in mortgage credit spreads across borrowers.

Lo conducted a study using Loan Level Price Adjustments, which are fees paid by the lender to Fannie Mae or Freddie Mac.

I estimate that a 25 basis point cut in interest rates results in a 50 percent increase in the likelihood of a potential borrower to demand a loan. ... I also find that a 25 percent basis point cut in interest rates results in an increase in loan size of approximately $15,000, or about 10 percent of the average origination volume.

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