Unlocking Mortgage Lock-In: Equilibrium Effects in a Spatial Housing Ladder Model

Mortgage borrowers are "locked in": forgoing moves to hold on to low rates. Lock-in reduces both housing supply, through households who do not sell, and demand, through households who do not buy elsewhere, evidenced by a 40% drop in U.S. existing home sales between 2022 and 2024. We show that mortgage lock-in raises net housing demand: missing downsizers stay in larger homes, particularly in expensive areas, demanding more housing and offsetting a third of the aggregate house price decline caused by higher rates. Using individual-level mortgage data, we provide causal evidence that lock-in disproportionately reduces moves down the housing ladder. We design a spatial housing ladder model with long-term mortgages, which generates a distribution of locked-in rates and a causal effect on mobility consistent with the data, and use it to study the equilibrium effects of lock-in. A temporary rate hike causes lock-in, increasing aggregate house prices by 4.4% and rents by 1.5% relative to a counterfactual without lock-in, while mortgage borrowers' mobility falls by 25%. A $10k tax credit to starter-home sellers modestly increases mobility but raises trade-up home prices. We estimate a cost of $650k per marginal move, indicating that demand-based housing policies are poorly targeted responses to lock-in in our model.