Low Mortgage Rates and Securitization: A Distinct Perspective on the US Housing Boom

Abstract

In this paper, we analyse the impacts of low interest rates and lax underwriting standards on the US housing boom around the beginning of the new millennium. We suggest a time‐varying mean of the log price‐to‐rent ratio (PtR) to capture the persistent changes in housing prices. We show that the increasing latent trend in the PtR was significantly affected by the increased securitization of residential mortgage loans and decreasing interest rates, with the former effect being about three times larger than the latter. In the absence of securitization, negative interest rates would have been needed to reproduce an equally large housing boom since 2003.