The Mortgage-Cash Premium Puzzle

95 Pages Posted: 19 Feb 2021 Last revised: 17 Mar 2022

See all articles by Michael Reher

Michael Reher

University of California, San Diego (UCSD) - Rady School of Management

Rossen I. Valkanov

University of California, San Diego (UCSD) - Rady School of Management

Date Written: March 15, 2022

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

Suggested Citation

Reher, Michael and Valkanov, Rossen, The Mortgage-Cash Premium Puzzle (March 15, 2022). Available at SSRN: https://ssrn.com/abstract=3751917 or http://dx.doi.org/10.2139/ssrn.3751917

Michael Reher (Contact Author)

University of California, San Diego (UCSD) - Rady School of Management ( email )

9500 Gilman Drive
Rady School of Management
La Jolla, CA 92093
United States

Rossen Valkanov

University of California, San Diego (UCSD) - Rady School of Management ( email )

9500 Gilman Drive
Rady School of Management
La Jolla, CA 92093
United States
858-534-0898 (Phone)

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