Finance Seminar

Title: A Macro-Finance Model of Mortgage Structure: Financial Stability & Risk Sharing
Speaker: Lu Liu, Assistant Professor of Finance, The Wharton School
Date: Friday, 13 December 2024
Time: 10.45 - 12.00
Location: Plattenstrasse 14, 8032 Zurich, Room PLM-F-103/104

The seminar is open to the public. No registration necessary.

Lu Liu is an Assistant Professor of Finance at The Wharton School, University of Pennsylvania. Her research focuses on household decisions in housing and mortgage markets, examining their macroeconomic implications and informing policy and market design. She holds a Ph.D. in Finance from Imperial College London.

What is the main focus of your research?
My research explores how households make decisions in the housing and mortgage markets and the broader economic impact of these choices. This includes decisions about mortgages, moving, selling, and refinancing, as well as the challenges and trade-offs households face. For example, my work on "mortgage lock-in" examines how low fixed rates discourage homeowners from moving when market rates rise, affecting housing markets and labor mobility. I also study how different mortgage structures impact financial stability and risk sharing.

What is a key finding from your research, and how does it impact everyday life, the real estate industry, or policymaking?
A key finding is how "mortgage lock-in" reduces mobility and reshapes the housing market. In the U.S., many homeowners have locked in low rates of around 4%  - for up to 30 years, but moving would mean remortgaging at higher market rates, close to 7%, significantly increasing costs. This financial burden keeps people in their homes, leading to fewer houses on the market, high prices, and challenges for first-time buyers.

For the real estate industry, this suggests the need for innovative solutions, like mortgages that can be transferred when moving. For policymakers, my research highlights the importance of targeted strategies to help first-time buyers, rather than relying solely on subsidies.

What inspired you to focus on the study of real estate markets?
I wanted to understand the connections between households and financial markets. During my time at the Bank of England, I saw how crucial mortgage and housing markets are for transmitting monetary policy to the economy. Mortgages also vary greatly across countries, raising important questions about how design choices affect economic stability and what lessons we can learn to build better housing finance systems.

In your opinion, what emerging trends or issues in the real estate market are likely to gain importance in the coming years?
Recent rate rises turned out more persistent than initially expected, so I think it will be interesting to understand the long-term implications of mortgage lock-in on housing markets and labor reallocation. Mortgages also continue to play a role for on-going vulnerabilities in the financial sector. Lastly, housing affordability and unequal housing access are likely to remain important topics for the future.