New Construction and Mortgage Default

In this paper we argue that because of non-linear depreciation schedules, appraisal complications, and homebuilders' significant bargaining power, loans collateralized by new construction are more likely to go into default relative to purchase loans for existing homes. Using loan-level mortgage records for more than 3 million loans originated between 2004 and 2009, we provide strong empirical evidence in support of this hypothesis. The unconditional default rate for mortgages used to purchase new construction was 5.6 percentage points higher than the default rates for other purchase loans in our sample. In our richest models that include extensive controls for borrower and loan characteristics as well as Census-tract-origination-year fixed effects, we find that loans for new homes were roughly 1.8 percentage points more likely to default.