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Mortgage Lock-In

Paper Session

Friday, Jan. 3, 2025 10:15 AM - 12:15 PM (PST)

Hilton San Francisco Union Square, Golden Gate 3
Hosted By: American Economic Association
  • Chair: Stijn Van Nieuwerburgh, Columbia University

Unlocking Mortgage Lock-In

Julia Fonseca
,
University of Illinois-Urbana-Champaign
Lu Liu
,
University of Pennsylvania
Pierre Mabille
,
INSEAD

Abstract

U.S. mortgage borrowers are "locked in": most have fixed rates at levels well below current market rates and would incur a substantial financial cost if they were to remortgage. Lock-in discourages them from putting their homes for sale and reduces liquidity in housing markets, affecting other sellers and buyers. These linkages pose a challenge for policy: What are effective ways to "unlock" mortgage lock-in? We build a spatial housing ladder model to evaluate such policies. We provide novel empirical evidence on moving behavior across the housing ladder as a function of lock-in, and calibrate the model using data on local U.S. housing markets in 2024. Households choose to enter and exit into homeownership, their geographical location, and the type of house they buy and sell in each location. In general equilibrium, house prices and rents endogenously depend on lock-in through households’ mobility between and within locations.

Macro Shocks and Housing Markets

Janice Eberly
,
Northwestern University
Gene Amromin
,
Federal Reserve Bank of Chicago

Abstract

The US experienced a historic housing price boom during the COVID-19 pandemic recession and recovery; nominal house prices rose 40\% from spring 2020 through 2022. The pandemic itself generated a positive demand shock for housing, and strong household balance sheets and low mortgage rates supported borrowing, further reinforcing stimulative policy. The dominance of long-term fixed rate mortgages in the US market meant that these low rates were locked in for existing homeowner-borrowers when monetary policy tightened sharply in 2022. The rapid rise in mortgage rates thereafter increased the cost of ownership at the margin, and the lock-in of existing homeowners reduced the supply of housing for sale. We use an equilibrium model with interest rate shocks to illustrate and quantify these dynamics. The lock-in of legacy borrowers' interest rates suppresses monetary policy transmission, which primarily affects first-time homebuyers with new mortgages. The lack of supply from lock-in of existing homeowners appears to have the most impact on home prices when it prevents homeowner exits rather than reducing turnover.

Mortgage Lock-in, Life-cycle Migration, and the Welfare Effects of Housing Market Liquidity

Kris Gerardi
,
Federal Reserve Bank of Atlanta
Franklin Qian
,
University of North Carolina-Chapel Hill
David Zhang
,
Rice University

Abstract

We use a search and matching model to study the heterogeneous welfare effects of housing market illiquidity due to mortgage lock-in over the lifecycle. We find that younger home buyers are disproportionately affected by mortgage lock-in, which disrupts their typical pattern of moving to higher-quality neighborhoods. We estimate model with heterogeneous seller-buyers bargaining within markets defined by CBSA-income terciles. We find that on average mortgage lock-in reduced household listing probabilities by 15\%, household match surplus by 18\%, and increased house prices by 4\% through its effects on bargaining power. The implied welfare effects are more negative for younger households. Our analysis suggests that the liquidity externality from mortgage lock-in has broad and heterogeneous equilibrium implications.

Discussant(s)
Andreas Fuster
,
SFI Lausanne
Vadim Elenev
,
Johns Hopkins University
Anthony Lee Zhang
,
University of Chicago
JEL Classifications
  • G5 - Household Finance
  • R3 - Real Estate Markets, Spatial Production Analysis, and Firm Location