Question

Suppose interest rates on residential mortgages of equal risk were 8% in california and 10% in new york. could this differential persist? what forces might tend to equalize rates? would the same differentials exist in business risk? why would this differential be different?

Answer 1

Regional mortgage rate differentials do exist, depending on supply & demand conditions in the different regions. However, high rates in one region would attract capital from other regions, and the end result would be a diffferential that was just sufficient to cover the costs of causing the transfer. Differentials are more likely in the residential mortgage market than the business loan market, and not at all likely for the large, nationwide firms, which do their borrowing in the lowest-cost money centers thereby quickly equalizing rates for large corporate loans. Interest rates are more competitive, making it easier for small borrowers, and borrowers in rural areas, to obtain lower cost loans