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RT @luliu_fin: 📢📢! New working paper + podcast alert !📢📢 .We study the equilibrium effects of mortgage lock-in on house prices, mobility, a….

That means that raising rates from historically low levels to fight inflation can, in itself, create some inflation through housing markets. Link to podcast: Link to paper:

Lock-in also increases rents if rental supply is sufficiently elastic. Renters who can't move up increase demand for rentals, but less downsizing lowers demand and the net effect is negative. But rental supply declines more as rental yields are driven down by higher house prices.

We model lock-in as the present-value cost of higher rates, estimated from 2024 data. While higher rates reduce the demand of those who don't move up the housing ladder, mortgage lock-in reduces downsizing and exits from homeownership, increasing net demand and thus house prices.

To study eqm. effect on prices, we designed a model where households can move between locations differing in avg. wages and costs, and within the housing ladder by renting or owning a starter or trade-up home. House prices and rents are endogenously determined by these decisions.

In another paper, Lu and I show that locking in low rates compared to market rates reduces mobility. But the result on house prices isn't obvious because a seller who isn't selling is typically also not buying. If both supply and demand go down, the effect on prices isn't clear.

I was excited to go back on @theindicator .@planetmoney to talk about a brand new paper with @luliu_fin and @pgmabille ! Mortgage rates have risen sharply from historically low levels while house prices and rents have remained stable. We show mortgage lock-in can explain this.

Link to updated draft:

We also have new results on small business entry and exit, types of moves (moving to better school districts vs. better employment opportunities), and a placebo check for outright owners and renters.

The sharp rise in rates between 2022-2023 shifted the vast majority of borrowers to the steep portion of the relationship between deltas and moving and, as a result, a given increase in rates has stronger effects on moving.

Why are lock-in effects stronger in 2022-2024? Our framework shows that moving is sensitive to mortgage rates in the steep part of the figure above, where mortgage deltas (locked-in rate minus current market rate) are below 2 p.p., and the relationship is flat otherwise.

RT @whartonknows: The housing market is largely frozen in "mortgage lock-in," explains @Wharton professor @LuLiu_Fin to open our four-part….

Ungated link:

First-time buyers don't have a mortgage to port, but making it less costly for homeowners to sell their homes would bring some liquidity back into the market. Link:

A good in-between option would be for borrowers to pay a fee and, in turn, be able to take their low rate with them when they move. That's called portability and is available in the UK and Canada. Policymakers could encourage this type of renegotiation of existing contracts.

We argue that the issue is that borrowers can't renegotiate with lenders because mortgages are securitized. That means borrowers can either move and swap the low rate they've locked in for much higher current rates or stay put and keep their rate. There's no in-between option.