ADJUSTABLE-RATE MORTGAGES, HOUSEHOLD MOBILITY, AND HOMEOWNERSHIP - A SIMULATION STUDY

A semi-Markov model is used to evaluate the effects of adjustable-rate mortgages on housing tenure decisions of recent movers and steady-sta te homeownership rates. Simulations were undertaken based on household data from the Panel Study of Income Dynamics together with informatio n on FRM-ARM rate spreads and Treasury yield curves. Results suggest t hat under most interest rate patterns that prevailed in the 1980s, ARM S had little effect on the relative cost of owning to renting and, as a result, had little effect on mover tenure choice and home sales. Mor eover, despite some minor projected increase in the percentage of move rs that choose to own when ARMs are available, ARM effects on steady-s tate owner-occupancy rates appear to be largely mitigated by an ARM-in duced tilt toward a relatively more mobile steady-state pool of owner- occupiers.