The Mortgage-Cash Premium Puzzle
64 Pages Posted: 19 Feb 2021 Last revised: 9 Mar 2021
Date Written: December 19, 2020
We document that in residential real estate transactions, mortgaged homebuyers pay a premium of 12% relative to all-cash buyers on the same property. This difference far exceeds the premium implied by standard transaction frictions and is of economic importance as all-cash purchases account for one-third of U.S. home purchases over our 1980-2017 sample. The 12% mortgage-cash premium estimate obtains under a variety of repeat-sales, instrumental variable, and semi-structural methodologies as well as novel data on backup purchase offers. A model with risk-averse home sellers, calibrated to realistic transaction frictions, implies a premium of only 3%. Explaining the remaining 9% requires sellers to be extremely risk-averse, to believe mortgaged transactions will fail 13 times more often than in the data or, in the event of transaction failure, to incur a utility loss equivalent to a 51% price cut.
Keywords: House Prices, Cash Buyers, Asset Pricing Puzzles, Affordability
JEL Classification: G31, R30, G12, G21, G41
Suggested Citation: Suggested Citation