House Price Beliefs And Mortgage Leverage Choice

Michael Bailey, Eduardo Davila, Theresa Kuchler and Johannes Stroebel

The Review of Economic Studies, 2019, vol. 86, issue 6, 2403-2452

Abstract: We study the relationship between homebuyers’ beliefs about future house price changes and their mortgage leverage choices. Whether more pessimistic homebuyers choose higher or lower leverage depends on their willingness and ability to reduce the size of their housing market investments. When households primarily maximize the levered return of their property investments, more pessimistic homebuyers reduce their leverage to purchase smaller houses. On the other hand, when considerations such as family size pin down the desired property size, pessimistic homebuyers reduce their financial exposure to the housing market by making smaller downpayments to buy similarly-sized homes. To determine which scenario better describes the data, we investigate the cross-sectional relationship between house price beliefs and mortgage leverage choices in the U.S. housing market. We use plausibly exogenous variation in house price beliefs to show that more pessimistic homebuyers make smaller downpayments and choose higher leverage, in particular in states where default costs are relatively low, as well as during periods when house prices are expected to fall on average. Our results highlight the important role of heterogeneous beliefs in explaining households’ financial decisions.

Keywords: Leverage; Mortgage choice; Disagreement; Heterogeneous beliefs; Collateralized credit (search for similar items in EconPapers)
JEL-codes: D12 D84 E44 G12 R21 (search for similar items in EconPapers)
Date: 2019
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Citations: View citations in EconPapers (58)

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Working Paper: House Price Beliefs And Mortgage Leverage Choice (2017)
Working Paper: House Price Beliefs And Mortgage Leverage Choice (2017)
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