The Journal of Finance publishes leading research across all the major fields of finance. It is one of the most widely cited journals in academic finance, and in all of economics. Each of the six issues per year reaches over 8,000 academics, finance professionals, libraries, and government and financial institutions around the world. The journal is the official publication of The American Finance Association, the premier academic organization devoted to the study and promotion of knowledge about financial economics.
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The Mortgage‐Cash Premium Puzzle
Published: 07/23/2024 | DOI: 10.1111/jofi.13373
MICHAEL REHER, ROSSEN VALKANOV
All‐cash homebuyers account for one‐third of U.S. home purchases between 1980 and 2017. We use multiple data sets and research designs to robustly estimate that mortgaged buyers pay an 11% premium over all‐cash buyers to compensate home sellers for mortgage transaction frictions. A dynamic, representative‐seller model implies only a 3% premium, which would suggest an 8% puzzle. Accounting for heterogeneity in selling conditions explains half of this difference, but a puzzle holds in conditions with high transaction risk. An experimental survey of U.S. homeowners replicates these patterns and suggests that belief distortions can explain the puzzle in these high‐risk states.