Working Paper

Locked In: Rate Hikes, Housing Markets, and Mobility

Abstract: Rising interest rates in 2022 introduced large moving costs for homeowners with low, fixed-rate mortgages. Using a novel dataset linking mortgage loans, consumer credit profiles, and property sales, we examine the effects of rate hikes on household mobility and the broader economic impacts of the resulting mortgage rate lock-in. As market rates rise relative to those on borrowers’ existing loans, likelihood of moving falls with the highest elasticity among borrowers just “in the money.” Our results suggest about 44% of the decline in moves among mortgage holders between 2021 and 2022 may be attributable to the widening gap between borrower’s existing and market rates. We find limited scope for labor misallocation due to lock-in, as moves across labor market areas are rather unaffected. Instead, lock-in primarily reduces within-metro churn and moves up the housing ladder, leading to fewer real estate listings and greater house price growth. We explain lock-in-driven price increases through a housing search model: in a seller’s market, reduced churn raises market tightness, driving up prices. Consistentwith such a model, we show measures of market tightness increase in response to lock-in, with the most significant effects in markets that were already tight.

Keywords: Mortgages and credit; Mobility; Housing demand; Rate lock; Housing supply;

JEL Classification: G21; G51; R21; R31;

https://doi.org/10.17016/FEDS.2024.088

Bibliographic Information

Provider: Board of Governors of the Federal Reserve System (U.S.)

Part of Series: Finance and Economics Discussion Series

Publication Date: 2024-11-20

Number: 2024-088