The Mortgage-Cash Premium Puzzle

Journal of Finance (forthcoming)

137 Pages Posted: 19 Feb 2021 Last revised: 6 Nov 2023

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: Nov 1, 2023

Abstract

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

Reher, Michael and Valkanov, Rossen, The Mortgage-Cash Premium Puzzle (Nov 1, 2023). Journal of Finance (forthcoming), 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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