The Mistakes People Make: Financial Decision Making when Buying and Owning a Home

56 Pages Posted: 17 Feb 2021

See all articles by Sumit Agarwal

Sumit Agarwal

National University of Singapore

Crocker Herbert Liu

Cornell University - School of Hotel Administration

Walter N. Torous

Massachusetts Institute of Technology

Vincent Yao

Georgia State University - J. Mack Robinson College of Business

Date Written: February 15, 2021

Abstract

Financial sophistication does not uniformly impact home ownership decisions. Sophisticated households are less likely to pay too high a mortgage rate and more likely to refinance when financially advantageous to do so but more likely to over pay for a house and less likely to default when underwater. We argue purchasing a home or defaulting are emotional decisions while deciding on mortgage terms or to refinance are analytical decisions amenable to the analyses of sophisticated households. Consistent with this, households learn over time to make better mortgage rate and refinancing decisions but not better house purchase price decisions.

Keywords: Household Finance, Mortgages, Refinance, Option Value, Financial Crisis

JEL Classification: D12, D14, G11, G2

Suggested Citation

Agarwal, Sumit and Liu, Crocker Herbert and Torous, Walter N. and Yao, Vincent, The Mistakes People Make: Financial Decision Making when Buying and Owning a Home (February 15, 2021). MIT Center for Real Estate Research Paper No. 21/09, Available at SSRN: https://ssrn.com/abstract=3785589

Sumit Agarwal

National University of Singapore ( email )

15 Kent Ridge Drive
Singapore, 117592
Singapore
8118 9025 (Phone)

HOME PAGE: http://www.ushakrisna.com

Crocker Herbert Liu

Cornell University - School of Hotel Administration ( email )

435B Statler Hall
Ithaca, NY 14853-6902
United States

Walter N. Torous (Contact Author)

Massachusetts Institute of Technology ( email )

Center for Real Estate and Sloan School
Cambridge, MA 02138
United States

Vincent Yao

Georgia State University - J. Mack Robinson College of Business ( email )

35 Broad Street
Atlanta, GA 30303-3083
United States

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