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

Itzhak Ben-David

Working Paper Series from Ohio State University, Charles A. Dice Center for Research in Financial Economics

Abstract: In pursuit of understanding the mechanism that relates the expansion in credit to the increase in real-estate prices during the real-estate bubble, I explore transaction-level data for 1994-2008. I document a strong correlation between borrowing at high leverage (>95% loan to value) and paying the full listing price or above. Homebuyers in these transactions pay prices that are higher than market prices by 3.4% ($5,700 on average) and they are 22.7% more likely to default on their mortgages, relative to other highly leveraged borrowers. The correlation between leverage and paying high prices is stronger beyond what a mechanical relation predicts: there is a discontinuity in the average leverage around the full listing price. The correlation is stronger for financially constrained and unsophisticated homebuyers, and in areas of high past price growth (indicative of buyer optimism). The study highlights the importance of buyer sophistication, financial constraints, and beliefs in determining prices and leverage.

JEL-codes: D14 G11 L85 R21 (search for similar items in EconPapers)
Date: 2011-09
New Economics Papers: this item is included in nep-ure
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Citations: View citations in EconPapers (3)

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Journal Article: High Leverage and Willingness to Pay: Evidence from the Residential Housing Market (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:ecl:ohidic:2011-17

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