Working Paper

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 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;

JEL Classification: G18; G21; E52;

https://doi.org/10.29338/wp2024-15

Status: Published in 2024

Bibliographic Information

Provider: Federal Reserve Bank of Atlanta

Part of Series: FRB Atlanta Working Paper

Publication Date: 2024-10-15

Number: 15