PUBLICATIONS
Abstract
In household finance markets, inactive households can implicitly cross-subsidize active households who promptly respond to financial incentives. We assess the magnitude and distribution of cross-subsidies in the mortgage market. To do so, we build a structural model of household mortgage refinancing and estimate it on rich administrative data covering the stock of outstanding mortgages in the UK. We estimate sizeable cross-subsidies that flow from relatively poorer households and those located in less-wealthy areas towards richer households and those located in wealthier areas. Our work highlights how the design of household finance markets can contribute to wealth inequality.
Reference Dependence in the Housing Market (with Steffen Andersen, Cristian Badarinza, Julie Marx and Tarun Ramadorai), 2022, American Economic Review
Abstract
We quantify reference dependence and loss aversion in the housing market using rich Danish administrative data. Our structural model includes loss aversion, reference dependence, financial constraints, and a sale decision, and matches key nonparametric moments, including a "hockey stick" in listing prices with nominal gains, and bunching at zero realized nominal gains. Households derive substantial utility from gains over the original house purchase price; losses affect households roughly 2.5 times more than gains. The model helps explain the positive correlation between aggregate house prices and turnover, but cannot explain visible attenuation in reference dependence when households are more financially constrained.
WORKING PAPERS
Revise & Resubmit, Journal of Finance
Abstract
We study the impact of rising mortgage rates on mobility and labor reallocation. Using individual-level credit record data and variation in the timing of mortgage origination, we show that a 1 p.p. decline in mortgage rate deltas (Δr), measured as the difference between the mortgage rate locked in at purchase and the current market rate, reduces moving rates by 0.68 p.p, or 9%. We find that this relationship is nonlinear: once Δr is high enough, households’ alternative of refinancing without moving becomes attractive enough that moving probabilities no longer depend on Δr. Lastly, we find that mortgage lock-in attenuates household responsiveness to shocks to nearby employment opportunities that require moving, measured as wage growth in counties within a 50 to 150-mile ring and instrumented with a shift-share instrument. The responsiveness of moving rates to wage growth is nearly three times as large for households who are less locked in (above-median Δr) than for those who are more locked in. We provide causal estimates of mortgage lock-in effects, highlighting unintended consequences of monetary tightening with long-term fixed-rate mortgages on mobility and labor markets.
- Knowledge@Wharton: "How Households Are Locked In by Rising Mortgage Rates" | Penn Today | Wharton Business Daily Podcast (Sirius XM) | The Wall Street Journal (1) | Zillow | NPR Planet Money (The Indicator) | The Wall Street Journal (2) | IMF Global Financial Stability Report (Ch. 1) | Bloomberg
- Presented at (selected): NBER Summer Institute (Household Finance), NBER Summer Institute (Real Estate), SITE Workshop on Financial Regulation, Red Rock Finance Conference, MFR Housing, Household Debt, and the Macroeconomy Conference*, CEPR European Conference on Household Finance, Holden Conference*, NBER Corporate Finance Fall Meeting*, AFA.
Revise & Resubmit, Review of Economic Studies
Abstract
Long-term fixed-rate mortgage contracts protect households against interest rate risk, yet most countries have relatively short interest rate fixation lengths. Using administrative data from the UK, the paper finds that the choice of fixation length tracks the life-cycle decline of credit risk in the mortgage market: the loan-to-value (LTV) ratio decreases and collateral coverage improves over the life of the loan due to principal repayment and house price appreciation. High-LTV borrowers, who pay large initial credit spreads, trade off their insurance motive against reducing credit spreads over time using shorter-term contracts. To quantify demand for long-term contracts, I develop a life-cycle model of optimal mortgage fixation choice. With baseline house price growth and interest rate risk, households prefer shorter-term contracts at high LTV levels, and longer-term contracts once LTV is sufficiently low, in line with the data. The mechanism helps explain reduced and heterogeneous demand for long-term mortgage contracts.
- Winner of the AREUEA Homer Hoyt Dissertation Award (2024)
- Winner of the Arthur Warga Award for Best Paper in Fixed Income at SFS Cavalcade North America (2023)
- Winner of the CEPR Household Finance Best Student Paper Award (2021)
- ESRB Ieke van den Burg Prize for Research on Systemic Risk (2022, Runner-Up)
- Knowledge@Wharton: "Why Long-Term Home Mortgages Have Costly Trade-Offs" | Bank of England Twitter Summary
- Presented at (selected): Bank of England, CEPR European Workshop on Household Finance, The Mortgage Market Research Conference (Federal Reserve Bank of Philadelphia), Texas Finance Festival, Chicago Booth Household Finance Conference, UCLA/FRBSF Conference on Housing, Financial Markets, and Monetary Policy, SFS Cavalcade North America, WFA.
Abstract
This paper studies supply-side product pricing when consumers underreact to non-salient fees. Using comprehensive data on issued and offered mortgages in the UK, I document that lenders differ substantially in the fees they charge, and that borrowers appear less overall cost-sensitive to products with fees. In order to distinguish from demand factors such as unobservable preferences or product characteristics, I show that lenders pass on firm-specific funding cost shocks via fees, but not interest rates, consistent with strategic pricing of fees, and maintaining competitive prices in the salient price dimension, interest rates. I further find heterogeneity in pricing across lenders: those who rely on high fees tend to have higher funding cost, lower return on equity and larger branch networks, in line with a specialization equilibrium in which high-cost lenders are able to match with less cost-sensitive consumers. (Previously circulated as "Product Proliferation as Price Obfuscation? Evidence from the Mortgage Market")
- Winner of the Michael J. Barclay Young Scholar Award (FRA 2018)
- Bank of England Staff Working Paper, Central Banking Article
- Presented at (selected): Imperial College, Bank of England, FCA Research Seminar, CEPR European Workshop in Household Finance, Showcasing Women in Finance Conference (SHoF), Annual Meeting of the Financial Research Association (FRA).