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

IMF Working Papers, January 6, 2023

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Paper examines the pricing-out phenomenon in the U.S. residential housing market associated with higher house prices due to monetary easing during the COVID-19 pandemic.
Approach:
- Set up a stylized general equilibrium model.
- Use U.S. household-level data to quantify the effect of house price changes on housing affordability relative to interest rate changes.
Key high-level findings:
- Monetary easing decreases the mortgage payment burden but raises house prices.
- Higher house prices lower housing affordability for first-time homebuyers.
- Monetary easing increases housing wealth inequality between first-time and repeat homebuyers.
- Empirical evidence of the pricing-out effect for all homebuyers; effect is stronger for first-time homebuyers than for repeat homebuyers.
Emphasis on importance of accounting for general equilibrium effects and distributional implications of monetary policy when assessing housing affordability.

Monetary easing:
- Decreases the mortgage payment burden.
- Raises house prices.
- Lowers housing affordability for first-time homebuyers.
- Increases housing wealth inequality between first-time and repeat homebuyers.
Conclusion from model: General equilibrium effects can offset or reverse direct affordability gains from lower interest rates via house price increases.

Quantification focuses on comparing:
- Effect of house price changes on housing affordability.
- Effect of interest rate changes on housing affordability.
Main empirical results:
- Evidence of the pricing-out effect for all homebuyers.
- Pricing-out effect is stronger for first-time homebuyers than for repeat homebuyers.

Monetary easing should be complemented with well-targeted policy measures that can boost housing affordability, particularly for first-time and lower-income households.
During aggressive monetary tightening:
- Fall in house prices may be insufficient or too slow to fully offset the immediate adverse impact of higher rates on housing affordability.
- Well-targeted policies remain necessary to protect housing affordability for vulnerable groups.
Paper highlights the need to account for distributional implications of monetary policy in policy design.