Salience and Mispricing: Homebuyers’ Housing Decisions

44 Pages Posted: 10 Jan 2016 Last revised: 19 Nov 2016

See all articles by Sumit Agarwal

Sumit Agarwal

National University of Singapore

Artashes Karapetyan

ESSEC Business School

Date Written: November 1, 2016

Abstract

We show that a regulatory disclosure of hidden debt eliminated a large mispricing in housing. In a setting where homebuyers must combine several sources of debt, they are biased towards hidden loans, especially if they are young, or have no experience in financial investments or home acquisition. By reducing the mispricing of units with hidden debt, the increased salience of debt benefited homebuyers, particularly those that suffered most from it. An average homebuyer could save about $20,000 by acquiring a dwelling with a one standard deviation lower debt. We confirm that lack of salience was the major source of the bias, by showing that the regulation nearly eliminated the mispricing.

Keywords: Salience, Housing, Cooperatives, Mortgage, Household Finance, Mispricing

JEL Classification: D12, G14, G21, G32

Suggested Citation

Agarwal, Sumit and Karapetyan, Artashes, Salience and Mispricing: Homebuyers’ Housing Decisions (November 1, 2016). Norges Bank Working Paper 21. Available at SSRN: https://ssrn.com/abstract=2712709 or http://dx.doi.org/10.2139/ssrn.2712709

Sumit Agarwal

National University of Singapore ( email )

15 Kent Ridge Drive
Singapore, 117592
Singapore
8118 9025 (Phone)

HOME PAGE: http://www.ushakrisna.com

Artashes Karapetyan (Contact Author)

ESSEC Business School ( email )

Avenue Bernard Hirsch
3
Cergy, 95021
France

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