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I am new to finance so may be this is a silly question but I got stuck here. I was thinking about how turnover rate is dependent on mortgage rate?

I was reading MBS by Lakhmir Hayre, there I had seen as mortgage rates are down, turnover rates first increase and after a long time they revert towards historical mean and vice-versa.

Can anybody please explain this relation?

Is this because when mortgage rates are high, the borrower will not move to a new house because he don't want a loan on high rate?

Thanks

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Turnover or moving home is, to first order just a function of mortgage age with some strong seasonal patterns, just like refi is related to first order to the mortgage rate and some measure of the savings which would be had by refinancing.

It is known though that homeowners who have secured a particularly low rate compared to the prevailing mortgage rate will not move as often as those with close to current commitment rates. This is called lock-in and is sometimes modelled via a multiplicative factor which slows turnover based on the WAC and Current Coupon (ie some measure of the expenses that would be incurred if financing a loan at the prevailing rate vs the rate the homeowner has secured).

Usually turnover is fit using slightly out of the money mortgage pools. Lock-in would be found by comparing these to deeply out of the money mortgage pools.

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It is a common sense. As mortgage rate goes down, borrowers of existing mortgages find their rates less attractive and costly. So they tend to switch to prevailing lower rates by refinancing their mortgages, then the turnover rate goes up. To the point where no borrowers find it worth, the rate reduces.

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    $\begingroup$ If they refinance their mortgage while remaining in the same house, why would housing turnover increase? $\endgroup$ – Alex C Jan 21 '18 at 2:14
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    $\begingroup$ @user31428, there is a difference between refinancing and housing turnover. $\endgroup$ – User Jan 21 '18 at 17:16
  • $\begingroup$ You’re talking about refi, not turnover. The question was about turnover (moving home) and why it should be related to prevailing mortgage rates. $\endgroup$ – Nick Firoozye Aug 19 '18 at 16:25

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