Interest and Non-Interest Terms in the Process of Mortgage Market Clearing: A Reply

horn (1990) argues that, in a situation of excess mortgage demand, loan JL applicants "with relatively low LV ratios (high DR ratios) have their demands satisfied while those with relatively high LV ratios are placed in a 'mortgage queue'. Hence successful applicants are on their desired demand curves but the aggregate demand curve does not shift and excess demand remains a feature of the market" (my italics). The key to Thorn's argument is that, in the circumstances indicated, the aggregate demand curve does not shift. This, however, is no more than a mere hypothesis which does not, I think, possess much apriori appeal. If, after searching the market, an applicant finds that, because of generalised excess demand, there still remains a large discrepancy between what he/she can afford or is willing to pay (including all non-price terms of which the DR is one) and what is required by the build­ ing society, that person will clearly cease to actively search for a mortgage. Just like the discouraged job seeker will leave the labour market, the dis­ couraged "mortgage seeker" will leave the mortgage market. The fact that building society managers may follow a convention of enlist­ ing applicants in a "mortgage queue" after having refused their demands is largely irrelevant to the issue of whether the aggregate demand curve shifts or not. It is the behaviour of mortgage applicants in such circumstances, rather than any rule that building societies may follow, which is relevant. Therefore, I continue to maintain plausibly that endogenous changes in the downpayment ratio will shift the mortgage demand schedule. This, how­ ever, as Thorn correctly points out, does create a problem with my analysis. With one particular qualification, I accept the analysis in paragraph three of his note. The best way around this problem is to relax the assumption that endogenous changes in DR shifts the demand schedule contemporaneously.