Salience and Mispricing: Homebuyers’ Housing Decisions

We show that a regulatory disclosure of hidden debt eliminated 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 about $20,000 by acquiring a dwelling with a one standard deviation lower debt. We confirm that lack of salience was the major source of the bias, by showing that the regulation nearly eliminated the mispricing.

Agarwal, Sumit and Karapetyan, Artashes, Salience and Mispricing: Homebuyers’ Housing Decisions (November 1, 2016). Norges Bank Working Paper 21, Available at SSRN: https://ssrn.com/abstract=2712709 or http://dx.doi.org/10.2139/ssrn.2712709