House Prices, Debt Burdens, and the Heterogeneous Effects of Mortgage Rate Shocks

By William Larson and Andrew Martinez

Published: June 17, 2025

A map of the United States showing model predicted house price responses to mortgage rate changes from 2020 to 2022, a period with high responsiveness. The areas with the most responsiveness include coastal states and sand states.

Abstract

We examine the heterogeneous effects of mortgage interest rate shocks on house prices in a monthly panel of U.S. cities. Mortgage interest rate shocks, identified using Blue Chip forecast errors and monetary policy surprises, affect house prices more in cities where more borrowers have high debt burdens. This is consistent with a model with both price frictions and credit constraints. Responsiveness to interest rate shocks thus varies by location and time period, and is related to both borrower characteristics and underwriting rules. This has important implications for understanding monetary policy transmission, systemic risk, and the role of household finances in the macroeconomy.

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Keywords: Asset Pricing, Household Finance, House Price Bubbles

JEL Classifications: G21, G51, E43, R30, C23

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