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 the effects of mortgage lock-in on volume is significantly more muted than its partial equilibrium estimates, with interest rates driving most of the aggregate decline in volume, and with the level and sign of effect varying greatly across geographies. Without mortgage lock-in, time on the market increases by 80–109%, house prices decline by 2%–4%, and match surplus increases by 0%–5%. The pricing and match surplus effects are 2–3 times larger 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