Salience of debt and homebuyers' credit decisions

Sumit Agarwal and Artashes Karapetyan
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Sumit Agarwal: National University of Singapore

No 2015/21, Working Paper from Norges Bank

Abstract: We show how a regulatory disclosure of hidden debt can eliminate a large mispricing in housing. In a setting where homebuyers must combine several sources of debt, they are biased towards hidden loans, especially if they are young, or have no experience in financial investments or home acquisition. By reducing the mispricing of units with hidden debt, the increased salience of debt benefited homebuyers, particularly those that suffered most from it. An average homebuyer could save $18,000 by acquiring a dwelling with a one standard deviation lower debt. We confirm that lack of salience was the source of the bias, by showing that the regulation nearly eliminated the mispricing.

Keywords: Salience; Housing; Cooperatives; Mortgage; Household Finance; Mispricing (search for similar items in EconPapers)
JEL-codes: D12 G14 G21 G32 (search for similar items in EconPapers)
Pages: 35 pages
Date: 2015-12-24, Revised 2016-11-20
New Economics Papers: this item is included in nep-ban, nep-cfn and nep-sea
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Persistent link: https://EconPapers.repec.org/RePEc:bno:worpap:2015_21

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