Mortgage Lock-In
Paper Session
Friday, Jan. 3, 2025 10:15 AM - 12:15 PM (PST)
- Chair: Stijn Van Nieuwerburgh, Columbia University
Macro Shocks and Housing Markets
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
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