Abstract

http://ssrn.com/abstract=1927294
 
 

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High Leverage and Willingness to Pay: Evidence from the Residential Housing Market


Itzhak Ben-David


Ohio State University - Fisher College of Business, Finance Department; National Bureau of Economic Research (NBER)

September 14, 2011

Charles A. Dice Center Working Paper No. 2011-17
Fisher College of Business Working Paper No. 2011-03-017

Abstract:     
In pursuit of understanding the mechanism that relates the expansion in credit to the increase in real-estate prices during the real-estate bubble, I explore transaction-level data for 1994-2008. I document a strong correlation between borrowing at high leverage (>95% loan to value) and paying the full listing price or above. Homebuyers in these transactions pay prices that are higher than market prices by 3.4% ($5,700 on average) and they are 22.7% more likely to default on their mortgages, relative to other highly leveraged borrowers. The correlation between leverage and paying high prices is stronger beyond what a mechanical relation predicts: there is a discontinuity in the average leverage around the full listing price. The correlation is stronger for financially constrained and unsophisticated homebuyers, and in areas of high past price growth (indicative of buyer optimism). The study highlights the importance of buyer sophistication, financial constraints, and beliefs in determining prices and leverage.

Number of Pages in PDF File: 43

Keywords: Lending,Mortgages,Overpayment,Sophistication,Financial constraints,residential,leverage,purchase,mortgage,mortgage broker,loan,price,financial crisis,real-estate broker,realtor,financial sophistication,optimism,crash,real-estate,real estate,interest rate,default,listing price,asking price,liquidity

JEL Classification: G11, D14, R21, L85

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Date posted: September 22, 2011 ; Last revised: March 14, 2012

Suggested Citation

Ben-David, Itzhak, High Leverage and Willingness to Pay: Evidence from the Residential Housing Market (September 14, 2011). Charles A. Dice Center Working Paper No. 2011-17; Fisher College of Business Working Paper No. 2011-03-017. Available at SSRN: http://ssrn.com/abstract=1927294 or http://dx.doi.org/10.2139/ssrn.1927294

Contact Information

Itzhak Ben-David (Contact Author)
Ohio State University - Fisher College of Business, Finance Department ( email )
2100 Neil Avenue
Fisher 700D
Columbus, OH 43210-1144
United States
773 988 1353 (Phone)
HOME PAGE: http://fisher.osu.edu/fin/faculty/Ben-David/index.htm

National Bureau of Economic Research (NBER) ( email )
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
HOME PAGE: http://fisher.osu.edu/fin/faculty/Ben-David/
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