Linking Asset Values to Financing: The Role of Small-Dollar Mortgages in Cash vs. Mortgage Property Price Disparities

Abstract

All-cash transactions and their associated price discounts in the housing market have increased following the Great Financial Crisis. We document that cash discounts vary substantially across property price levels, with the largest discounts occurring in the lowest-priced properties, and explore the influence of credit supply on these discounts. Using the expansion of enforcement actions on mortgage fraud post-GFC as an instrument for local small credit supply, we find that a one-percentage-point decrease in small loan approvals increases cash discounts by 8.4%. The impact is larger in low-cost houses and disadvantaged communities. The results point to the cause for the observed overall decrease in relative prices for low-cost houses, highlighting the importance of small loan availability for wealth-building through homeownership among lower-income households.