Can brokerage have an equilibrium selection role?

Article Abstract:

A model of housing markets with multiple search equilibria is presented. However, there are two weaknesses related to multiplicity of equilibria: the possibility of the economy coming to a close at a Pareto inferior equilibrium and the increased difficulty in forecasting the impact of policy measures. An attempt is made to find out if these problems can be fixed by the brokerage institution. Findings reveal that brokerage can minimize the number of equilibria and can likewise enhance welfare by moving the economy to a Pareto superior equilibrium. Nevertheless, brokerage can also add to the problem in certain situations. In these instances, it can reduce welfare and result in more coordination problems by expanding the number of equilibria.

Research, Models, Real estate agents, Real estate agents and brokers

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Variable rate loans and financed activities: the case of adjustable rate mortgages

Article Abstract:

Housing activity grew between 1982 and 1984, as did the use of adjustable rate mortgages (ARMs). Doubt is expressed, however, about trade literature assertions that the ARMs stimulated housing activity. A statistical housing forecasting model is used to show empirically that ARMs did not in fact increase housing consumption very much. The evidence indicates instead that declining fixed mortgage interest rates between 1982 and 1983 promoted much of the housing activity growth. ARM demand can still be rationalized by borrowers' desire to 'smooth' consumption in light of uncertain future incomes, even in circumstances when use of ARMs results in no extra borrower consumption of housing.

Finance, Interest rates

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Adjustable and fixed mortgages as a screening mechanism for default risk

Article Abstract:

This article evaluates borrowers from different levels of default risk to determine their choice between fixed rate mortgages and adjustable rate mortgages. The authors assert that the mortgage choice is a signal of default risk, and that an increase in high risk increases the likelihood of a separating equilibrium when both types are offered.

United States, Statistical Data Included, Beliefs, opinions and attitudes, Mortgages, Consumers, Attitudes, Fixed rate mortgages

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