Charles A. Dice Center Working Paper No. 2011-17
45 Pages Posted: 22 Sep 2011 Last revised: 18 Jul 2017
Date Written: July 17, 2017
Homebuyers who pay the full-listing price are more likely to take a mortgage with at 100% loan-to-value than otherwise lower prices. These homebuyers overpay by 3.4% ($5,700 on average) and 22.7% more likely to default on their mortgages. The correlation is not mechanical: 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 (potentially indicative of buyer optimism). The study helps explaining how expansion in credit translated to higher prices during 2001-2006.
Keywords: lending, mortgages, overpayment, sophistication, financial constraints, optimism
JEL Classification: G11, D14, R21
Suggested Citation: Suggested Citation
Ben-David, Itzhak, High Leverage and Willingness to Pay: Evidence from the Residential Housing Market (July 17, 2017). Charles A. Dice Center Working Paper No. 2011-17; Fisher College of Business Working Paper No. 2011-03-017. Available at SSRN: https://ssrn.com/abstract=1927294 or http://dx.doi.org/10.2139/ssrn.1927294