The Dynamics of Home Sales in the Presence of Mortgage Lock-In and Their Implications for Policy (working paper, 2024)
The recent increase in interest rates has substantially reduced home-selling. This paper considers the dynamic problem of a household with the dual options to move and to refinance in a model where interest rates and idiosyncratic housing match quality are both stochastic. The model admits the possibility of “lock-in,” whereby households reduce their likelihood of sale in the face of high mortgage interest rates. A calibrated version of the model is used to analyze the dynamics of home sales moving forward and the impacts of proposed policies. The model predicts that future home sales will be higher than would be predicted based on the prior empirical relationship established in the literature. Intuitively, the lock-in episode of 2022-2023 has left many households mismatched to their homes and they will be eager to move in the future, particularly if interest rates fall. The model also predicts that a subsidy for home-sellers would likely increase economic efficiency, but it would require roughly $40 of government expenditure for every $1 of social surplus created, since many moves would occur even in the absence of the subsidy. Therefore, such a subsidy is in large part simply a transfer to homeowners and their lenders.
A Model of Endogenous Mortgage Design: Costly Refinancing as a Price Discrimination Mechanism (working paper, 2024)
Conventional mortgages penalize “unsophisticated” borrowers, who pay a premium for the option to refinance that they will not exercise. This paper presents a model to explain why such mortgages are dominant and alternatives that do not penalize unsophisticated borrowers are rare. In the model, lenders can simultaneously offer both a conventional Fixed-Rate Mortgage (FRM) and an alternative Self-Refinancing Mortgage (SRM), which refinances without borrower input and so treats all borrowers equally. Under certain conditions, offering only the FRM can be optimal for lenders due to its ability to price discriminate, extracting more from unsophisticated borrowers than sophisticated ones. An off-the-shelf calibration of the model finds that indeed the FRM is more profitable than the SRM, despite a tradeoff created by the FRM’s inefficient use of refinancing effort. Turning to policy, a tax on refinancing can increase efficiency, reduce costs for unsophisticated borrowers, and potentially cause an endogenous change in mortgage design towards an SRM.
Mortgage Design: Price Discrimination [file]
How Do Mortgage Refinances Affect Debt, Default, and Spending? Evidence from HARP (with Andreas Fuster; AEJ: Macroeconomics, 2021)
We use quasi-random access to the Home Affordable Refinance Program (HARP) to identify the causal effect of refinancing into a lower-rate mortgage on borrower balance sheet outcomes. Refinancing substantially reduces borrower default rates on mortgages and other debt. Refinancing also causes borrowers to expand their use of debt instruments, such as auto loans, home equity lines, and other consumer debts that are proxies for spending. Borrowers that appear more constrained ex ante grow these debts more strongly after refinancing but also pay down credit card balances by more. These borrowers also have lower take-up of the refinancing opportunity.
The Home Sales Volatility Puzzle: An Empirical Exploration (working paper, 2019)
The recent housing cycle in the United States saw a large swing not only in home prices but in the number of home sales as well. This uses a comprehensive dataset on US home sales to investigate two popular explanations for the cyclicality of selling activity: “house lock,” whichconjectures that falling prices cause down-payment constraints to bind and prevent current homeowners from selling their homes; and nominal loss aversion, which proposes that cognitive frictions prevent homeowners from selling when doing so would not garner a price as high asthe one they originally paid for the house. I find that while there is evidence that both of these mechanisms are active at the household level, they explain a fairly small portion of the decline in sales from boom to bust: likely no more than 10%.
The Measurement and Behavior of Uncertainty: Evidence from the ECB Survey of Professional Forecasters (with Robert Rich, Joseph Song, and Joseph Tracy; Journal of Applied Econometrics, 2016)
We examine matched point and density forecasts of output growth, inflation and unemployment from the ECB Survey of Professional Forecasters. We construct measures of uncertainty from individual histograms, and find that the measures display countercyclical behavior and have increased across all forecast horizons since 2007. We also derive measures of forecast dispersion and forecast accuracy, and find that they are not reliable proxies for uncertainty. There is, however, evidence of a meaningful co‐movement between uncertainty and aggregate point predictions for output growth and unemployment. These results are robust to changes in the composition of the survey respondents over time.