The Pricing-Out Phenomenon in the U.S. Housing Market

The Pricing-Out Phenomenon in the U.S. Housing Market Francesco Beraldi and Yunhui Zhao WP/23/1IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management. 2023 JAN © 2023 International Monetary Fund WP/23/1IMF Working Paper Strategy, Policy, and Review Department The Pricing-Out Phenomenon in the U.S. Housing Market Prepared by Francesco Beraldi and Yunhui Zhao1 Authorized for distribution by Stephan Danninger January 2023 IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management. ABSTRACT: The COVID-19 pandemic further extended the multi-year housing boom in advanced economies and emerging markets alike against massive monetary easing during the pandemic. In this paper, we analyze the pricing-out phenomenon in the U.S. residential housing market due to higher house prices associated with monetary easing. We first set up a stylized general equilibrium model and show that although monetary easing decreases the mortgage payment burden, it would raise house prices, lower housing affordability for first-time homebuyers, and increase housing wealth inequality between first-time and repeat homebuyers. We then use the U.S. household-level data to quantify the effect of t he house price change on housing affordability relative to that of t he interest rate change. We find evidence of the pricing-out effect for all homebuyers; moreover, we find that the pricing-out effect is stronger for first-time homebuyers than for repeat homebuyers. The paper highlights the importance of accounting for general equilibrium effects and distributional implications of monetary policy while assessing housing affordability. It also calls for complementing monetary easing with well-targeted policy measures that can boost housing affordability, particularly for first-time and lower-income households. Such measures are also needed during aggressive monetary tightening, given that the fall in house prices may be insufficient or too slow to fully offset the i mmediate adverse impact of higher rates on housing affordability. RECOMMENDED CITATION: Beraldi, Francesco, and Yunhui Zhao. 2023. “The Pricing-Out Phenomenon in the U.S. Housing Market,” IMF Working Paper No. 23/1, International Monetary Fund, Washington, D.C. JEL Classification Numbers: C10, C53, E31, E37, R30 Keywords: Pricing-Out, U.S. Housing Market, Housing Affordability, Distributional Effects, Monetary Policy Author’s E-Mail Address: Francesco.Beraldi@yale.edu; YZhao@imf.org 1 The study was sponsored by the Fund Internship Program in the summer of 2022. We are grateful for the very helpful comments by Viral Acharya (NYU Stern), Michal Andrle (all from the IMF, unless stated otherwise), Tohid Atashbar, Imen Benmohamed, Nina Biljanovska, Fabian Bornhorst, Stephan Danninger, Sonali Das, Kris Gerardi (Atlanta Fed), Divya Kirti, Aiko Mineshima, Dmitry Plotnikov, Sergio Rodriguez, and participants at the IMF SPR Macro Policy Division Brownbag Seminar and the Fund-wide seminar in August 2022. 2 Contents I. Introduction ............................................................................................................................. 3 II. Literature Review.................................................................................................................... 8 III. Model .................................................................................................................................... 11 A. Setup and Partial Equilibrium ........................................................................................... 12 B. General Equilibrium .......................................................................................................... 16 C. Responses to Monetary Policy Shocks ............................................................................. 17 IV. Empirical Analyses ............................................................................................................... 21 A. Hypotheses ........................................................................................................................ 21 B. Data ................................................................................................................................... 22 C. Empirical Strategy ............................................................................................................ 22 D. Regression Results ............................................................................................................ 25 E. Robustness Checks.........