Stock Market Milestones and Mortgage Demand: Evidence from US

Abstract

Using several large datasets of mortgage application and household credit in the past 20 years in the US, we document that after the stock market index reaches a milestone number (round 1000), more households apply mortgage for home purchase, and they are more likely to apply mortgage for second homes compared to non-milestone historical maxima. The loan amount also increases after the milestone event. These results are mainly driven by households with high equity holdings. The applicants are more likely to have high equity holdings and high FICO scores, but the mortgage loan terms are riskier with higher interest rate, LTV, and DTI, and the applicants are more likely to default in the two years after loan originations. We investigate the mechanisms and show that the effect is driven by the attention effect rather than the wealth effect. We also show that the results are unlikely to be driven by other events around the milestone or banks’ supplyside response. Our results highlight the linkage between the stock market and the housing market.