Information Salience and Mispricing in Housing

Sumit Agarwal () and Artashes Karapetyan ()
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Sumit Agarwal: School of Business, National University of Singapore, Singapore 119077, Singapore
Artashes Karapetyan: Department of Finance, ESSEC Business School, 95021 Cergy-Pontoise, Île-de-France, France

Management Science, 2022, vol. 68, issue 12, 9082-9106

Abstract: Making the purchase price fully salient to consumers has been shown to affect demand and equilibrium prices in various markets. Using a setting where part of the home acquisition price is in the form of nonsalient debt, we show this can happen in housing—a market where a typical household makes its largest acquisition. A regulation that made the debt and the total price salient for homebuyers eliminated a large mispricing caused by consumers’ inattention to the debt before the regulation. An average homebuyer would lose about $13,300 by acquiring a dwelling with one-standard deviation ($51,000)-higher debt, but this is nearly eliminated after the regulation. To shed light on the underlying channels, we use administrative data and show that young, financially inexperienced, and first-time homebuyers used to overpay the most. The results are not driven by rational channels based on liquidity constraints and adverse selection. Our findings imply that making all-inclusive house price and mortgage features salient at the time of advertising the sale can help avoid unintentional borrowing.

Keywords: salience; housing; cooperatives; mortgage; household finance; mispricing (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:68:y:2022:i:12:p:9082-9106

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