Abstract: As climate change exacerbates natural disasters, homeowners’ insurance premiums are rising dramatically. We examine the impact of premium increases on borrowers’ mortgage and credit outcomes using a novel dataset on home insurance policies for 6.7 million borrowers. We find that higher premiums significantly raise the probability of mortgage delinquency and prepayment. These results hold using a novel instrumental variable. The mortgage delinquency effect is larger for higher loan-to-value mortgages, while the prepayment effect is smaller for these loans. The effects are present in both GSE and non-GSE mortgages. Our findings unveil a channel through which climate change can threaten household financial health and potentially impact the stability of the financial system.
Discussant: Emily Gallagher, University of Colorado-Boulder
Kristopher Gerardi, Federal Reserve Bank of Atlanta
Franklin Qian, University of North Carolina-Chapel Hill
David Zhang, Rice University
Abstract: We use a search and matching model to study the heterogeneous welfare effects of housing market illiquidity due to mortgage lock-in over the lifecycle. We find that younger home buyers are disproportionately affected by mortgage lock-in, which disrupts their typical pattern of moving to higher-quality neighborhoods. We estimate a model with heterogeneous seller-buyers bargaining within markets defined by CBSA-income terciles and with endogenous migration across markets. We find that on average mortgage lock-in reduces household listing probabilities by 21--23%, increases time on the market by 52--142%, increases house prices by 3%--8%, and decreases match surplus by 3%--29% through its effects on the search and matching process. The pricing and match surplus effects are larger for younger households and for households in lower-income areas, due to a higher idiosyncratic dispersion in buyer valuation leading to larger match surplus variation in those areas. Our study highlights the welfare benefits of market thickness in real estate markets.
Julia Fonseca, University of Illinois-Urbana-Champaign
Lu Liu, University of Pennsylvania
Pierre Mabille, INSEAD
Abstract: Mortgage borrowers are "locked in": forgoing moves to keep low mortgage rates. We study the general
equilibrium effects of mortgage lock-in on housing markets. We provide causal evidence that lock-in increases prices, particularly in expensive areas, because locked-in borrowers would otherwise demand 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, especially in expensive areas. A $10k tax credit to starter-home sellers modestly unlocks mobility while increasing trade-up home prices.
Abstract: Commission rates for housing transactions are twice as high in the United States than in other countries. Policymakers have raised concerns that the practice of sellers offering buyers’ brokers commissions can lead to high commissions and harm consumers. This paper examines the equilibrium impacts of a proposed policy called “decoupling,” which would require buyers and sellers to each pay their respective brokers. I develop a structural model integrating buyers, sellers, and brokers to characterize the equilibrium house prices, commissions, and welfare. I estimate the model with rich observed heterogeneity and credible sources of identifying variation using shifters of house prices and commissions. I find that decoupling reduces commissions paid by 53%, as sellers no longer have to offer high commissions to attract buyers, and brokers compete for price- sensitive buyers. Sellers and buyers experience a surplus gain of 4% of the total transaction value from having higher net proceeds than the status quo. I find notable surplus gains for buyers across income as sellers pass through part of their commission savings to house prices.
