The Long Shadows of the Great Inflation : Evidence from Residential Mortgages

In most countries, the prevalent long-term mortgage is variable-rate. The US is an outlier, with 80% fixed-rate mortgages. We link the puzzling US market structure to long-lasting effects of the Great Inflation and structurally estimate the welfare implications. First, sentiment towards variable-rate mortgages negatively correlates with past nominal rates. Second, inflation exposure directly affects interest-rate expectations and mortgage choice. Third, we use SCF and RFS data, in combination with interest-rate surveys (PMMS and MIRS), to estimate a structural discrete-choice model and quantify payoff consequences. Our simulations imply that Baby Boomers overpaid by $23bn for fixed-rate mortgages in the late 1980s-1990s