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

Kristopher Gerardi, Franklin Qian () and David Hao Zhang
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Franklin Qian: https://www.kenan-flagler.unc.edu/faculty/directory/franklin-qian/

No 15, FRB Atlanta Working Paper from Federal Reserve Bank of Atlanta

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 a model with heterogeneous seller-buyers bargaining within markets defined by CBSA-income terciles and with endogenous migration across markets. We find that on average mortgage lock-in reduces household listing probabilities by 21 percent to 23 percent, increases time on the market by 52 percent to 142 percent, increases house prices by 3 percent to 8 percent, and decreases match surplus by 3 percent to 29 percent through its effects on the search and matching process. The pricing and match surplus effects are larger for younger households and for households in lower-income areas, due to a higher idiosyncratic dispersion in buyer valuation leading to larger match surplus variation in those areas. Our study highlights the welfare benefits of market thickness in real estate markets.

Keywords: mortgage lock-in; moving to opportunity; housing market liquidity; idiosyncratic dispersion in house prices; FRMs (search for similar items in EconPapers)
JEL-codes: E52 G18 G21 (search for similar items in EconPapers)
Pages: 61
Date: 2024-10-15
New Economics Papers: this item is included in nep-dge and nep-ure
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Published in 2024

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DOI: 10.29338/wp2024-15

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