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Given the importance of affordable housing, it is important to study the economic factors that influence it, both on a national and a local scale. In recent years, housing affordability metrics have reported worrying trends, further driving the importance of theoretical research and empirical data that supports it. This paper examined several hypotheses related to housing affordability and federal interest rates. High federal interest rates have long been deemed a cause of worsening housing affordability. Federal interest rates influence mortgage rates, which in turn influence mortgage prices. However, current theory is divided as to the aggregate impact of lowered interest rates on housing affordability. Some suggest that this is overall positive, while others point out that demand effects induced by lower mortgage prices may crowd-out struggling families and worsen affordability. This paper tests current literature regarding the aggregate impact of interest rates on housing affordability as well as exploring the possibility of varying impacts at the local level. Using econometric modeling, this analysis was not able to find any statistically significant correlation between interest rates and housing affordability outcomes at the local level, and there appeared to be no interaction between owner-occupancy rates (a local characteristic) and the effect of interest rates on a community. However, at a national scale, lower interest rates were associated with lower mortgage costs and increasing housing affordability outcomes, suggesting that recent doubts may not stand on solid footing.
ContributorsRounds, Luke (Author) / Thomson, Henry (Thesis director) / Cordova, Luis (Committee member) / Barrett, The Honors College (Contributor) / WPC Graduate Programs (Contributor) / Economics Program in CLAS (Contributor)
Created2025-05