Migration Responses to Moving Costs: Evidence from the US Mortgage Market

Michael Varley, Joint Program in Financial Economics PhD student

I exploit variation in moving costs induced by mortgage contracts to study how a fall in moving costs effects the likelihood a household will move and how these responses vary with financial constraints. To do so, I study mortgages with prepayment penalties in their contract, a fee that is only charged in the event a borrower terminates their mortgage in a specified period of time. Leveraging the variation in the length of time these penalties are enforced, I implement a difference-in-differences research design using linked administrative loan, credit, and payroll data to establish that in the year after a prepayment penalty expires, the probability a borrower moves rises by 2 percentage points, an economically meaningful increase in migration. To understand what drives the large treatment effect, I find that this effect varies by a borrower’s LTV ratio prior to moving and credit score at mortgage origination, suggesting a mixture of down payment and liquidity constraints play a role in one’s decision to
move. Using a sufficient statistics approach, I map these estimates into a dynamic location choice model to understand what these measures can tell us about the extent of spatial misallocation in the U.S.