Salience and Mispricing: Homebuyers’ Housing Decisions
44 Pages Posted: 10 Jan 2016 Last revised: 19 Nov 2016
Date Written: November 1, 2016
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: Suggested Citation