Julia Fonseca and Lu Liu, Mortgage Lock-In, Mobility, and Labor Reallocation.
Abstract: We study the impact of rising mortgage rates on mobility and labor reallocation. Using individual-level credit record data and variation in the timing of mortgage origination, we show that a 1 p.p. decline in mortgage rate deltas (Δr), measured as the difference between the mortgage rate locked in at purchase and the current market rate, reduces moving rates by 0.68 p.p, or 9%. This effect is economically meaningful and implies that projected rate increases until 2033 will reduce moving by 25%. Moreover, we show that this relationship is nonlinear: once Δr is high enough, households’ alternative of refinancing without moving becomes attractive enough that moving probabilities no longer depend on Δr. Lastly, we find that mortgage lock-in attenuates household responsiveness to shocks to employment opportunities, measured as MSA-level wage growth and instrumented with a shift-share instrument. The responsiveness of moving rates to wage growth is half as large for households who are more locked in (below-median Δr) than for those who are less locked in. We provide causal estimates of mortgage lock-in effects, highlighting unintended consequences of monetary tightening with long-term fixed-rate mortgages on mobility and labor markets.
Lu Liu, The Demand for Long-Term Mortgage Contracts and the Role of Collateral.
Abstract: Long-term fixed-rate mortgage contracts protect households against interest rate risk, yet most countries have relatively short interest rate fixation lengths. Using administrative data from the UK, the paper finds that the choice of fixation length tracks the life-cycle decline of credit risk in the mortgage market: the loan-to-value (LTV) ratio decreases and collateral coverage improves over the life of the loan due to principal repayment and house price appreciation. High-LTV borrowers, who pay large initial credit spreads, trade off their insurance motive against reducing credit spreads over time using shorter-term contracts. To quantify demand for long-term contracts, I develop a life-cycle model of optimal mortgage fixation choice. With baseline house price growth and interest rate risk, households prefer shorter-term contracts at high LTV levels, and longer-term contracts once LTV is sufficiently low, in line with the data. The mechanism helps explain reduced and heterogeneous demand for long-term mortgage contracts.
Steffen Andersen, Cristian Badarinza, Lu Liu, Julie Marx, Tarun Ramadorai (2022), Reference Dependence in the Housing Market, American Economic Review, 112 (10), pp. 3398-3440.
Abstract: We quantify reference dependence and loss aversion in the housing market using rich Danish administrative data. Our structural model includes loss aversion, reference dependence, financial constraints, and a sale decision, and matches key nonparametric moments, including a "hockey stick" in listing prices with nominal gains, and bunching at zero realized nominal gains. Households derive substantial utility from gains over the original house purchase price; losses affect households roughly 2.5 times more than gains. The model helps explain the positive correlation between aggregate house prices and turnover, but cannot explain visible attenuation in reference dependence when households are more financially constrained.
Jack Fisher, Alessandro Gavazza, Lu Liu, Tarun Ramadorai, Jagdish Tripathy (Under Revision), Refinancing Cross-Subsidies in the Mortgage Market.
Abstract: In household finance markets, inactive households can implicitly cross-subsidize active households who promptly respond to financial incentives. We assess the magnitude and distribution of cross-subsidies in the mortgage market. To do so, we build a model of household mortgage refinancing and structurally estimate it on rich administrative data on the stock of outstanding UK mortgages in June 2015. We estimate sizeable cross-subsidies during this sample period, from relatively poorer households and those located in less-wealthy areas towards richer households and those located in wealthier areas. Our work highlights how the design of household finance markets can contribute to wealth inequality.
Description: Revise & Resubmit, Journal of Financial Economics.
Lu Liu, Non-Salient Fees in the Mortgage Market.
Abstract: This paper studies supply-side product pricing when consumers underreact to non-salient fees. Using comprehensive data on issued and offered mortgages in the UK, I document that lenders differ substantially in the fees they charge, and that borrowers appear less overall cost-sensitive to products with fees. In order to distinguish from demand factors such as unobservable preferences or product characteristics, I show that lenders pass on firm-specific funding cost shocks via fees, but not interest rates, consistent with strategic pricing of fees, and maintaining competitive prices in the salient price dimension, interest rates. I further find heterogeneity in pricing across lenders: those who rely on high fees tend to have higher funding cost, lower return on equity and larger branch networks, in line with a specialization equilibrium in which high-cost lenders are able to match with less cost-sensitive consumers.
