Abstract

This study explores how the decision to purchase a house is influenced by rental benchmarks. In particular, do prospective house buyers compare the monthly rental payment and the monthly mortgage installment? Panel data evidence suggest that homebuyers covered in the Panel of Study of Income Dynamics (PSID) are likely to pay for mortgage about the same per month as their rental payment just before the home purchase. These results are largely replicated in the German Socio-Economic Panel Study (SOEP). We then test this pattern in seven experiments and find discontinuities consistent with reference-dependent utility functions representing the preference to buy a house as a function of the monthly mortgage. The likelihood of buying a house is more strongly reduced when the mortgage monthly installment becomes slightly higher than the offered monthly rental payment for the same house. Our results are consistent with the monthly rent acting as a reference point for the monthly mortgage and are not fully explained by budget constraints. While more present-biased individuals use more the rent as reference point for the mortgage, financial literacy and numeracy do not influence this pattern.