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Kristopher Gerardi, Franklin Qian, and David Zhang

Working Paper 2024-15

October 2024

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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.

JEL classification: G18, G21, E52

Key words: mortgage lock-in, moving to opportunity, housing market liquidity, idiosyncratic dispersion in house prices, FRMs

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

The authors thank Elliot Annenberg, John Campbell, Jack Liebersohn, Lu Liu, and Gregor Schubert for helpful discussions. They also thank Hansen Pen and Payten Werbowsky for excellent research assistance. The views expressed here are those of the authors and not necessarily those of the Federal Reserve Bank of Atlanta or the Federal Reserve System. Any remaining errors are the authors' responsibility.

Kris Gerardi is with the Federal Reserve Bank of Atlanta. Franklin Qian is with the University of North Carolina at Chapel Hill. David Zhang is with Rice University. Please address questions regarding content to Kristopher Gerardi, Federal Reserve Bank of Atlanta, 1000 Peachtree Street NE, Atlanta, GA 30309.