Alternative Mortgage Instruments: Their Effects On Consumer Housing Choices in an Inflationary Environment

Abstract

This article compares the effects of the standard fixed-payment mortgage instrument (SMI) and the graduated-payment mortgage instrument on an individual's housing decisions in an inflationary environment. Using a simulation model of life-cycle consumer choice, the results with the SMI suggest that low to moderate rates of inflation increase housing demand but rates in excess of 10% have the opposite effect. The results also suggest that the GPM has the potential to increase substantially housing demand, with households willing to pay moderate premiums in order to obtain GPMs.