Housing finance in a stochastic economy: Contract pricing and choice

An empirical analysis of macroeconomic time series from the mortgage, housing, capital and labor markets is based on life-cycle consumption and mortgage option pricing considerations. Vector autoregression techniques characterize the long-run equilibrium and short-run dynamics of the mortgage market as it relates to the other sectoral markets. A simultaneous-equations model characterizes the partial equilibrium in the differentiated products market for fixed- and adjustable-rate mortgage contracts. The empirical results reveal the impacts that market conditions have on mortgage volumes and prices, and they generally support the implications of the consumption and pricing theories.