FHA/VA Financing and Price Discounts
AbstractThis study examines the effects of FHA and VA mortgage financing on home prices. FHA and VA borrowers receive higher loan-to-value ratios (LVRs) and payment to income (PTIs) ratios relative to conventional underwriting standards. These more lenient standards are offset by the payment of additional financing costs in the form of default insurance premiums and origination fees. The hypothesis for this study is that the origination fees (in the form of insurance premiums and the funding fees) associated with FHA and VA financing will (1) be capitalized into buyer reservation values and (2) result in price discounts relative to conventional loans with lower LVRs. Using a database of nearly 9,000 homes sales in the San Antonio, TX area, we perform hedonic analyses that indicate that both types of government backed financing are associated with reductions in selling prices. The results of this study may imply a cost shifting behavior on the part of buyers and an implicit subsidy on the part of sellers. Our preferred regressions find that the price discounts for FHA underwriting are about 4% (3.81% to 4.14%) relative to conventional financing. VA discounts, as expected, are smaller, ranging from about 2% to 3.46%. Given the prior literature, we hypothesize that the results are likely a result of the fact that FHA and VA homebuyers are able to shift some costs to sellers.
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Bibliographic InfoArticle provided by American Real Estate Society in its journal journal of Real Estate Research.
Volume (Year): 30 (2008)
Issue (Month): 2 ()
Contact details of provider:
Postal: American Real Estate Society Clemson University School of Business & Behavioral Science Department of Finance 401 Sirrine Hall Clemson, SC 29634-1323
Web page: http://www.aresnet.org/
Postal: Diane Quarles American Real Estate Society Manager of Member Services Clemson University Box 341323 Clemson, SC 29634-1323
Find related papers by JEL classification:
- L85 - Industrial Organization - - Industry Studies: Services - - - Real Estate Services
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