Norges Bank

Working Paper

Salience of debt and homebuyers’ credit decisions

Author:
Sumit Agarwal and Artashes Karapetyan
Series:
Working Paper
Number:
21/2015

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.

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ISSN 1502-8190 (online)

Published 30 December 2015 10:30
Edited 3 November 2016 09:02
Published 30 December 2015 10:30
Edited 3 November 2016 09:02