The Mortgage-Cash Premium Puzzle
by Michael Reher and Rossen I. Valkanov
Journal of Finance (2024)
by Michael Reher and Rossen I. Valkanov
Journal of Finance (2024)
Two implications are that you can save a lot of money if you are able to lower your price point enough to do without a mortgage, and that helping children buy a home may be one of the cost-effective ways to aid them. To reduce moral hazard (their saving less in anticipation of a gift) you could require them to match from their savings the amount you are giving towards the home purchase.Abstract:
All-cash homebuyers account for one-third of U.S. home purchases between 1980 and 2017. We use multiple data sets and research designs to robustly estimate that mortgaged buyers pay an 11% premium over all-cash buyers to compensate home sellers for mortgage transaction frictions. A dynamic, representative-seller model implies only a 3% premium, which would suggest an 8% puzzle. Accounting for heterogeneity in selling conditions explains half of this difference, but a puzzle holds in conditions with high transaction risk. An experimental survey of U.S. homeowners replicates these patterns and suggests that belief distortions can explain the puzzle in these high-risk states.
Statistics: Posted by Beliavsky — Sun Aug 04, 2024 8:08 pm — Replies 5 — Views 1139