Unlocking Mortgage Lock-In: Evidence From a Spatial Housing Ladder Model

U.S. mortgage borrowers are “locked in”: unwilling to sell their house and move, as that would require giving up low fixed-rate mortgage rates for high current rates. This paper studies the general equilibrium effects of mortgage lock-in on house prices, mobility, and homeownership and evaluates policies aimed at unlocking mortgage lock-in. To do so, the authors design a spatial housing ladder model that captures moving patterns across different housing market segments. Households can move between locations differing in economic opportunity and cost of living, and within the housing ladder by deciding whether to rent, own a starter home, or own a trade-up home. In equilibrium, house prices and rents are endogenously determined by household mobility within and between locations, and are thus impacted by lock-in. We provide new empirical evidence on moving behavior along the housing ladder and over the life cycle and calibrate the model with rich microdata from 2024. Despite also reducing housing demand, the authors show that the net effect of mortgage lock-in is a negative shock to housing supply, which increases house prices and thus creates inflationary pressure. The authors further evaluate the equilibrium effects of the proposed 2024 Mortgage Relief Credit, which would provide a $10,000 subsidy to sellers of starter homes. They find that the policy modestly increases first-time home buying and has larger effects on upward mobility at the top of the housing ladder. The upward mobility within the housing ladder comes at the cost of renters and starter homeowners moving from high- to low-opportunity areas, as house prices in higher-priced areas increase.