The Mortgage-Cash Premium Puzzle
Journal of Finance (forthcoming)
137 Pages Posted: 19 Feb 2021 Last revised: 6 Nov 2023
Date Written: Nov 1, 2023
All-cash homebuyers account for one-third of U.S. home purchases over 1980-2017. We use multiple datasets and research designs to robustly estimate that mortgaged buyers must pay an 11% premium over all-cash buyers to compensate home sellers for mortgage transaction frictions. A dynamic, representative-seller model implies only a 3% premium, which would suggest an 8% puzzle. Accounting for heterogeneity in selling conditions explains half of this difference, but there is still a puzzle in conditions with high transaction risk. An experimental survey of U.S. homeowners replicates these patterns and suggests that belief distortions can explain the puzzle in these high-risk states.
Keywords: House Prices, Cash Buyers, Asset Pricing Puzzles, Affordability
JEL Classification: G31, R30, G12, G21, G41
Suggested Citation: Suggested Citation