Mortgage Lock-in, Lifecycle 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 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