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

Charles A. Dice Center Working Paper No. 2011-17

Fisher College of Business Working Paper No. 2011-03-017

45 Pages Posted: 22 Sep 2011 Last revised: 18 Jul 2017

Itzhak Ben-David

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

Date Written: July 17, 2017

Abstract

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

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

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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