Abstract:
In this paper we offer a nontechnical pedagogical tool demonstrating the interrelationship between the mortgage market and the housing market. While the importance of the mortgage market in the housing market is well established in the literature, an instructive model is still needed. We present a novel and straightforward extension of the DiPasquale and Wheaton (DPW) model, using a price-rent (PR) ratio incorporating the loan-to-value (LTV) ratio. In our augmented DPW model, the LTV adjusted PR ratio allows for an explicit analysis of the opposing effects of lending gain and risk pricing on the user costs of housing. Moreover, it highlights how changes in the mortgage market may contribute to booms and busts in the markets both for owner-occupied and rental housing.