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

Ben-David, Itzhak

doi:10.2139/ssrn.1927294

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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

See all articles by Itzhak Ben-David

Itzhak Ben-David

Ohio State University (OSU) - Department of Finance; National Bureau of Economic Research (NBER)

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

Ben-David, Itzhak, High Leverage and Willingness to Pay: Evidence from the Residential Housing Market (January 26, 2018). Real Estate Finance, Forthcoming, Fisher College of Business Working Paper No. 2011-03-017, Charles A. Dice Center Working Paper No. 2011-17, Available at SSRN: https://ssrn.com/abstract=1927294 or http://dx.doi.org/10.2139/ssrn.1927294