Mortgage lock-in reduces sellers, but lower rates tighten markets
A new working paper from the Federal Reserve Bank of Philadelphia finds that elevated mortgage rates cause homeowners to delay selling, reducing transaction volumes. However, the study concludes that buyers are more sensitive to rate changes than sellers are to lock-in, meaning lower rates would increase sales but not ease market tightness.
Quantifying missing sellers
Researchers Aaron Graybill and Kyle Mangum employed a two-component approach to quantify the effects of mortgage lock-in on housing market tightness.
First, they used transaction-level microdata to estimate survival models of housing tenures, measuring the elasticity of offer-for-sale decisions with respect to mortgage rate differences.
This allowed them to quantify 'missing sellers'—homeowners who would have sold their properties absent elevated rates.
Second, these elasticity estimates were fed into a search and matching model to measure the combined effects of seller lock-in and buyer sensitivity to mortgage rates.
The study finds that while lock-in measurably causes sellers to withdraw from the market, buyers exhibit greater sensitivity to mortgage rates than sellers do to lock-in.
This implies that a drop in rates would increase sales volumes but paradoxically not reduce overall market tightness.
The dual disincentive of rates
The study addresses the recent phenomenon of 'mortgage lock-in,' where homeowners with historically low mortgage rates are discouraged from selling, as relocating would necessitate resetting their mortgage terms at higher current rates.
This disincentive keeps potential sellers out of the market, contributing to low transaction volumes, short time-on-market, and sustained price growth observed in recent years.
However, the authors highlight a theoretical ambiguity: while high rates deter sellers, they also reduce buyer affordability.
The paper emphasizes that the overall effect of mortgage rates on market tightness is complex, as some sellers are also prospective buyers, making it a relative calculation.
Counter-intuitive, yet crucial
This research delivers a crucial, albeit counter-intuitive, insight: simply lowering mortgage rates will not alleviate housing market tightness.
The dominance of buyer sensitivity over seller lock-in effects fundamentally reshapes the policy discussion around housing supply and demand.
Policymakers must consider this complex interplay when devising strategies to stabilize the real estate sector.