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High Leverage and Willingness to Pay: Evidence from the Residential Housing Market

Author

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  • Itzhak Ben‐David

Abstract

I document a strong correlation between paying the full listing price on homes and borrowing 100% loan‐to‐value. Homebuyers who do both overpay by 2.8% to 3.9% ($4,800 to $6,700) and are 22.7% more likely to have their properties foreclosed within one year. The correlation is not mechanical: there is a discontinuity in the average leverage around the full listing price. The correlation is stronger in areas with a high fraction of financially constrained and unsophisticated residents, and in areas of high past price growth (potentially indicative of buyer optimism).

Suggested Citation

  • Itzhak Ben‐David, 2019. "High Leverage and Willingness to Pay: Evidence from the Residential Housing Market," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 47(3), pages 643-684, September.
    • Handle: RePEc:bla:reesec:v:47:y:2019:i:3:p:643-684
    DOI: 10.1111/1540-6229.12234
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    Cited by:

    1. Rawley Z. Heimer & Alp Simsek, 2017. "Should Retail Investors' Leverage Be Limited?," NBER Working Papers 24176, National Bureau of Economic Research, Inc.
    2. Rahah Ismail, 2013. "Unraveling the Inflated House Price in the New Housing Supply," ERES eres2013_44, European Real Estate Society (ERES).
    3. Rawley Heimer, 2014. "Can Leverage Constraints Help Investors?," Working Papers (Old Series) 1433, Federal Reserve Bank of Cleveland.
    4. Sumit Agarwal & Artashes Karapetyan, 2022. "Information Salience and Mispricing in Housing," Management Science, INFORMS, vol. 68(12), pages 9082-9106, December.

    More about this item

    JEL classification:

    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • L85 - Industrial Organization - - Industry Studies: Services - - - Real Estate Services
    • R21 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - Housing Demand

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