Housing, Mortgages, and Self-Control

Abstract

Using a quantitative theoretical framework this paper analyzes how problems of self-control influence housing and mortgage decisions. The results show that people with stronger problems of self-control are less likely to become homeowners, even though houses serve as commitment for saving. The paper then investigates the welfare effects of regulating mortgage products if people differ in their degree of self-control. Holding house prices fixed, higher down payment requirements and restrictions on refinancing turn out to be beneficial to people with sufficiently strong problems of self-control, even though these policies restrict access to the commitment device.

Estimating Temptation and Commitment Over the Life Cycle

“…Nakajima (2012) evaluates the welfare consequences of rising household indebtedness in a model with temptation. Schlafmann (2016) studies the effects of temptation on housing and mortgage choices and the welfare consequences of mortgage regulations. Kovacs and Moran (2019) build on the framework in the current article to show that temptation and commitment can account for the large share of hand‐to‐mouth households and generate realistic heterogeneity in the marginal propensity to consume.…”

“…(2010) show that a savings subsidy would be welfare improving when households suffer from temptation. Schlafmann (2016) uses temptation preferences to understand housing and mortgage choices and the welfare consequences of mortgage regulations. Her results show that households with higher temptation are less likely to become home owners, but higher downpayment requirements could be beneficial to these households.…”

Temptation and Commitment: A Model of Hand-to-Mouth Behavior

“…Temptation preferences have been applied in a number of macroeconomic models (Amador, Werning, and Angeletos, 2006;Krusell, Kuruscu, and Smith, 2010;Nakajima, 2012;Schlafmann, 2020). That said, temptation is not the only way to generate presentbiased households and therefore to create demand for commitment devices.…”

Long‐Term Contracting With Time‐Inconsistent Agents

“…1313 See Schlafmann (2021), Ghent (2011), and Atlas, Johnson, and Payne (2017) for evidence of present bias in mortgage markets, and Meier and Sprenger (2010) for credit card markets. Our equilibrium pattern of repeatedly postponing repayments is broadly consistent with the findings from Carter, Liu, Skiba, and Sydnor (2017) on payday loans.…”