From Atif Mian and Amir Sufi:
We investigate how house price and interest rate movements affect household spending through mortgage refinancing. Aggregate movements in house prices and interest rates generate sizable mortgage refinancing waves with a large amount of cross-sectional variation across U.S. zip codes in the share of mortgages that are refinanced. We use this cross-sectional variation across zip codes to examine the effect of refinancing–or “cash-on-hand” shocks–on household spending from 2000 to 2012. Cash-out refinancing in response to house price growth has a very large effect on household spending, particularly among low credit score, poorer zip codes. The effects of interest-rate driven mortgage refinancing are mixed. For the full sample, we find almost no effect of interest-rate driven mortgage refinancing on spending. However, we find a positive effect on spending during the 2008 to 2012 period. House-price growth-driven and interest-rate driven refinancing generate cash on hand shocks for different households, which is crucial for understanding these results.
