Life-Cycle Housing and Portfolio Choice with Bond Markets

I study optimal housing and portfolio choice under stochastic inflation and real interest rates. Renters allocate financial wealth to stocks and bonds with different maturities. Homeowners also choose the mortgage type. I show that hedge demands and financial constraints vary over an investor's lifetime, giving rise to a pronounced life-cycle pattern in the optimal housing, stock, bond, and mortgage choice. Young homeowners take an adjustable-rate mortgage (ARM) and invest financial wealth predominantly in stocks. Later in the life cycle bonds play an important role, mainly as a hedge against changing real interest rates and house prices. Fairly risk-tolerant homeowners still prefer an ARM, while more risk-averse investors rather choose a combination of an ARM and a fixed-rate mortgage.Portfolio choice; mortgage; housing; term structure of interest rates

Dynamic portfolio and mortgage choice for homeowners

We investigate the impact of owner-occupied housing on financial portfolio and mortgage choice under stochastic inflation and real interest rates. To this end we develop a dynamic framework in which investors can invest in stocks and bonds with different maturities. We use a continuous-time model with CRRA preferences and calibrate the model parameters using data on inflation rates and equity, bond, and house prices. For the case of no short-sale constraints, we derive an implicit solution and identify the main channels through which the housing to total wealth ratio and the horizon affect financial portfolio choice. This solution is used to interpret numerical results that we provide when the investor has short-sale constraints. We also use our framework to investigate optimal mortgage size and type. A moderately risk-averse investor prefers an adjustable-rate mortgage (ARM), while a more risk-averse investor prefers a fixedrate mortgage (FRM). A combination of an ARM and an FRM further improves welfare. Choosing a suboptimal mortgage leads to utility losses up to 6%

Mortgage Timing

The fraction of newly-originated mortgages that are of the adjustable-rate (ARM) versus the fixed-rate (FRM) type exhibits a surprising amount of time variation. A simple utility framework of mortgage choice points to the bond risk premium as theoretical determinant: when the bond risk premium is high, FRM payments are high, making ARMs more attractive. We confirm empirically that the bulk of the time variation in household mortgage choice can be explained by time variation in the bond risk premium. This is true regardless of whether bond risk premia are measured using forecasters' data, a VAR term structure model, or a simple rule-of-thumb based on adaptive expectations. This simple rule-of-thumb moves in lock-step with mortgage choice, thereby lending further credibility to a theory of strategic mortgage timing by households.

Mortgage Timing

Mortgages can be broadly classified into adjustable-rate mortgages (ARMs) and fixed-rate mortgages (FRMs). We document a surprising amount of time variation in the fraction of newly-originated mortgages that are of either type in the US and UK. A simple utility framework points to the importance of term structure variables in explaining this variation. In particular, the inflation risk premium, real interest rate risk premium and both the real rate and expected inflation volatility arise as potential determinants. We use a flexible VAR-model to measure these four term structure variables and show that they account for the bulk of variation in the ARM share. Risk premia alone explain sixty percent of the time variation in mortgage choice. Other term structure variables, such as the yield spread, seem only weakly related to the ARM share. We uncover interesting differences between the US and the UK. In the US, the inflation risk premium is most strongly related to the ARM share, while in the UK it is the real rate risk premium. In the US, FRMs contain a prepayment option. We analyze the impact of the prepayment option on optimal mortgage choice

Mortgage Timing

We study how the term structure of interest rates relates to mortgage choice, both at the household and the aggregate level. A simple utility framework of mortgage choice points to the long-term bond risk premium as theoretical determinant: when the bond risk premium is high, fixed-rate mortgage payments are high, making adjustable-rate mortgages more attractive. This long-term bond risk premium is markedly different from other term structure variables that have been proposed, including the yield spread and the long yield. We confirm empirically that the bulk of the time variation in both aggregate and loan-level mortgage choice can be explained by time variation in the bond risk premium. This is true whether bond risk premia are measured using forecasters' data, a VAR term structure model, or from a simple household decision rule based on adaptive expectations. This simple rule moves in lock-step with mortgage choice, lending credibility to a theory of strategic mortgage timing by households

Mortgage Timing

Mortgages can be broadly classified into adjustable-rate mortgages (ARMs) and fixed-rate mortgages (FRMs). We document a surprising amount of time variation in the fraction of newly-originated mortgages that are of either type in the US and UK. A simple utility framework points to the importance of term structure variables in explaining this variation. In particular, the inflation risk premium, real interest rate risk premium and both the real rate and expected inflation volatility arise as potential determinants. We use a flexible VAR-model to measure these four term structure variables and show that they account for the bulk of variation in the ARM share. Risk premia alone explain sixty percent of the time variation in mortgage choice. Other term structure variables, such as the yield spread, seem only weakly related to the ARM share. We uncover interesting differences between the US and the UK. In the US, the inflation risk premium is most strongly related to the ARM share, while in the UK it is the real rate risk premium. In the US, FRMs contain a prepayment option. We analyze the impact of the prepayment option on optimal mortgage choice

Mortgage Timing

We study how the term structure of interest rates relates to mortgage choice, both at the household and the aggregate level. A simple utility framework of mortgage choice points to the long-term bond risk premium as theoretical determinant: when the bond risk premium is high, fixed-rate mortgage payments are high, making adjustable-rate mortgages more attractive. This long-term bond risk premium is markedly different from other term structure variables that have been proposed, including the yield spread and the long yield. We confirm empirically that the bulk of the time variation in both aggregate and loan-level mortgage choice can be explained by time variation in the bond risk premium. This is true whether bond risk premia are measured using forecasters' data, a VAR term structure model, or from a simple household decision rule based on adaptive expectations. This simple rule moves in lock-step with mortgage choice, lending credibility to a theory of strategic mortgage timing by households

Collaborative stepped care for anxiety disorders in primary care: aims and design of a randomized controlled trial

Background. Panic disorder (PD) and generalized anxiety disorder (GAD) are two of the most disabling and costly anxiety disorders seen in primary care. However, treatment quality of these disorders in primary care generally falls beneath the standard of international guidelines. Collaborative stepped care is recommended for improving treatment of anxiety disorders, but cost-effectiveness of such an intervention has not yet been assessed in primary care. This article describes the aims and design of a study that is currently underway. The aim of this study is to evaluate effects and costs of a collaborative stepped care approach in the primary care setting for patients with PD and GAD compared with care as usual. Methods/design. The study is a two armed, cluster randomized controlled trial. Care managers and their primary care practices will be randomized to deliver either collaborative stepped care (CSC) or care as usual (CAU). In the CSC group a general practitioner, care manager and psychiatrist work together in a collaborative care framework. Stepped care is provided in three steps: 1) guided self-help, 2) cognitive behavioral therapy and 3) antidepressant medication. Primary care patients with a DSM-IV diagnosis of PD and/or GAD will be included. 134 completers are needed to attain sufficient power to show a clinically significant effect of 1/2 SD on the primary outcome measure, the Beck Anxiety Inventory (BAI). Data on anxiety symptoms, mental and physical health, quality of life, health resource use and productivity will be collected at baseline and after three, six, nine and twelve months. Discussion. It is hypothesized that the collaborative stepped care intervention will be more cost-effective than care as usual. The pragmatic design of this study will enable the researchers to evaluate what is possible in real clinical practice, rather than under ideal circumstances. Many requirements for a high quality trial are being met. Results of this study will contribute to treatment options for GAD and PD in the primary care setting. Results will become available in 2011. Trial registration. NTR1071