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

61 Pages Posted: 20 Sep 2024

See all articles by Kristopher Gerardi

Kristopher Gerardi

Federal Reserve Bank of Atlanta

Franklin Qian

UNC Kenan-Flagler Business School - Finance Department; UNC Kenan-Flagler Business School

David Zhang

Rice University - Jesse H. Jones Graduate School of Business

Date Written: July 28, 2024

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 21-23%, increases time on the market by 52-142%, increases house prices by 3%-8%, and decreases match surplus by 3%-29% 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

Suggested Citation

Gerardi, Kristopher S. and Qian, Franklin and Zhang, David, Mortgage Lock-in, Lifecycle Migration, and the Welfare Effects of Housing Market Liquidity (July 28, 2024). Available at SSRN: https://ssrn.com/abstract=4933879 or http://dx.doi.org/10.2139/ssrn.4933879

Kristopher S. Gerardi

Federal Reserve Bank of Atlanta ( email )

1000 Peachtree Street N.E.
Atlanta, GA 30309-4470
United States
404-498-8561 (Phone)

HOME PAGE: http://sites.google.com/site/kristophergerardishomepage/

Franklin Qian

UNC Kenan-Flagler Business School - Finance Department ( email )

UNC Kenan-Flagler Business School ( email )

Chapel Hill, NC
United States

David Zhang (Contact Author)

Rice University - Jesse H. Jones Graduate School of Business ( email )

6100 South Main Street
P.O. Box 1892
Houston, TX 77005-1892
United States

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