The Mortgage-Cash Premium Puzzle

Abstract

We document that mortgaged homebuyers pay an 11% premium relative to all-cash homebuyers. This premium far exceeds the 3% premium implied by a realistically calibrated model of rational home sellers with mortgage transaction frictions. We obtain similar results from various estimators (e.g., repeat-sales, instrumental-variable, matching, semi-structural), novel data on non-accepted offers, and a survey of U.S. homeowners. Experimental evidence suggests that uncertainty aversion about mortgage transaction frictions, driven by inexperienced home sellers, best explain the puzzle of 8% (11% - 3%) Our findings matter economically, as all-cash purchases account for one-third of all U.S. home purchases over 1980-2017.

Keywords: House Prices, Cash Buyers, Asset Pricing Puzzles, Affordability

JEL Classification: G31, R30, G12, G21, G41