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

_IMF Working Papers, January 6, 2023_

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## Bibliographic details
- Authors: Francesco Beraldi, Yunhui Zhao
- Published: January 6, 2023
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9798400229039.001

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### Summary and scope
- 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.

### Model findings (stylized general equilibrium model)
- 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.

### Empirical findings (household-level data)
- 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.

### Policy implications and recommendations
- 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.

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_Source: https://www.imf.org/en/publications/wp/issues/2023/01/06/the-pricing-out-phenomenon-in-the-u-s-527856_