Authors: Paul M. Taube and Don N. MacDonald

Start Page: 73
End Page: 79
Volume: 4
Issue Number: 1
Year: 1989
Publication: Journal of Real Estate Research

Abstract: In this note, the choice of mortgage instrument in an inflationary environment was analyzed. Using Federal Home Loan Bank data on the proportion of loans closed as variable-rate mortgages for the period 1981 to 1987, it was found that higher anticipated inflation held with certainty increased this proportion, while greater inflation uncertainty in the sense of a Diamond-Stiglitz mean-preserving spread decreased this proportion. That is, homebuyers appear to prefer fixed-rate mortgages in the presence of inflation uncertainty and to reject lender efforts to shift interest-rate risk through variable-rate mortgages.