High Leverage and Willingness to Pay: Evidence from the Residential Housing Market
Real Estate Finance, Forthcoming
Fisher College of Business Working Paper No. 2011-03-017
Charles A. Dice Center Working Paper No. 2011-17
48 Pages Posted: 22 Sep 2011 Last revised: 27 Jan 2018
Date Written: January 26, 2018
Abstract
I document a strong correlation between paying the full listing price on homes and borrowing 100% loan-to-value. Homebuyers who do both overpay by 2.8% to 3.9% ($4,800 to $6,700) and are 22.7% more likely to have their properties foreclosed within one year. The correlation is not mechanical: there is a discontinuity in the average leverage around the full listing price. The correlation is stronger for in areas with high fraction of financially constrained and unsophisticated residents, and in areas of high past price growth (potentially indicative of buyer optimism).
Keywords: mortgages, overpayment, sophistication, financial constraints, optimism
JEL Classification: G11, D14, R21
Suggested Citation: Suggested Citation
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