Predicting Unobserved Individual-level Causal Effects

“Unlocking Mortgage Lock-In: Evidence From a Spatial Housing Ladder Model”

With the Lunch Seminar series, the Department of Finance is bringing eminent and up-and-coming researchers from around the world to Luxembourg.

Abstract

U.S. mortgage borrowers are “locked in”: unwilling to sell their house and move, as that would require giving up low fixed mortgage rates for higher current rates. We study the general equilibrium effects of mortgage lock-in on house prices, mobility, and homeownership and evaluate policies aimed at unlocking mortgage lock-in. To do so, we design a spatial housing ladder model that captures moving patterns across different housing market segments. Households can move between locations differing in economic opportunity and cost of living, and within the housing ladder by deciding whether to rent, own a starter home, or own a trade-up home. In equilibrium, house prices and rents are endogenously determined by household mobility within and between locations, and are thus impacted by the effects of lock-in on housing demand and supply. We provide new empirical evidence on moving behavior along the housing ladder and over the life cycle and calibrate the model with rich microdata from 2024. While higher rates reduce the demand of households who would otherwise move up the housing ladder, we show that mortgage lock-in substantially reduces downsizing and exits from homeownership, increasing net demand for housing and resulting in higher house prices in most market segments. We further evaluate the equilibrium effects of recent policy proposals. While a $10k tax credit to starter-home sellers modestly increases upward mobility at the top of the housing ladder, a $25k down-payment assistance program to first-time buyers raises mobility at the bottom of the housing ladder. However, policy-induced moves are a small fraction of total moves, as the vast majority of transfer recipients would have moved absent these subsidies. This leads to costs between $400k to $600k per induced move, suggesting that demand-based housing policies are poorly targeted responses to lock-in.