Unlocking Mortgage lock-In: Evidence from a Spatial Housing Ladder Model

Abstract

Mortgage borrowers are "locked in": forgoing moves to hold on to low mortgage rates. We study the general equilibrium effects of mortgage lock-in on housing markets and evaluate a policy aimed at unlocking lock-in. We provide evidence that lock-in increases prices relative to a counterfactual where rates reset, particularly in expensive areas, because locked-in borrowers would otherwise have downsized and demanded less housing. We design a spatial housing ladder model with long-term mortgages, generating a distribution of locked-in rates and equilibrium effects on mobility and prices consistent with the data. A temporary rate hike causes lock-in, increasing housing demand and prices relative to a counterfactual without lock-in, especially in expensive areas. A $10k tax credit to starter-home sellers modestly unlocks mobility while increasing trade-up home prices, with the vast majority of transfer recipients being infra-marginal.