Self-Assessed Financial Literacy in Housing Markets

47 Pages Posted: 5 Aug 2019

See all articles by Boaz Abramson

Boaz Abramson

Stanford University - Department of Economics

Andres Yany

Stanford University - Department of Economics

Date Written: May 31, 2019

Abstract

This paper introduces a novel dimension of household heterogeneity that plays an important role in housing markets. Households who self-assess themselves to be more financially literate are 1) more likely to own a house and 2) take on higher leverage on their home. We solve a heterogeneous agent portfolio choice model to infer the role of mortgage terms and of expectations on future house prices for the empirical patterns. We find that households with higher levels of self-assessed financial literacy are in fact better at the parts of the transaction that are relevant to them, namely access to more accommodating mortgage terms when they are young and better risk-return trade-offs when they are old. Moreover, by ignoring heterogeneity in financial literacy, standard models introduce quantitatively substantial biases in evaluating housing market policies. Housing demand elasticity with respect to wealth is downsized by approximately 40% when taking financial literacy into account.

JEL Classification: E21, R21, G02

Suggested Citation

abramson, boaz and Yany, Andres, Self-Assessed Financial Literacy in Housing Markets (May 31, 2019). Available at SSRN: https://ssrn.com/abstract=3429793 or http://dx.doi.org/10.2139/ssrn.3429793

Boaz Abramson (Contact Author)

Stanford University - Department of Economics ( email )

Landau Economics Building
579 Serra Mall
STANFORD, CA 94305-6072
United States

Andres Yany

Stanford University - Department of Economics ( email )

Landau Economics Building
579 Serra Mall
STANFORD, CA 94305-6072
United States

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