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Creative Financing and House Prices: A Theoretical Inquiry into the Capitalization Issue

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  • Jan K. Brueckner

Abstract

Since buyers offer a premium for access to creative financing (CF), creatively‐financed houses will sell for more than otherwise identical houses purchased with standard financing. A commonly suggested method for adjusting house values to eliminate the effects of CF is the “cash equivalence” method, where the CF premium is assumed to equal the present value of savings from CF. This paper shows that in a world with active housing speculators, the cash equivalence approach gives the right answer: In an “arbitrage” equilibrium, house values must differ by exactly the present value of CF savings. Further analysis shows that when capital markets are perfect, each consumer is indifferent between CF and standard financing when arbitrage equilibrium obtains. Without perfect capital markets, however, consumers will strictly prefer one financing mode or the other.

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  • Jan K. Brueckner, 1984. "Creative Financing and House Prices: A Theoretical Inquiry into the Capitalization Issue," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 12(4), pages 417-426, December.
    • Handle: RePEc:bla:reesec:v:12:y:1984:i:4:p:417-426
    DOI: 10.1111/1540-6229.00331
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    Cited by:

    1. John R. Knight & Thomas Miceli & C. F. Sirmans, 2000. "Repair Expenses, Selling Contracts, and House Prices," Journal of Real Estate Research, American Real Estate Society, vol. 20(3), pages 323-336.
    2. Darren K. Hayunga, 2018. "Sales Concessions in the US Housing Market," The Journal of Real Estate Finance and Economics, Springer, vol. 56(1), pages 33-75, January.
    3. Isaac F. Megbolugbe, 1989. "A Hedonic Index Model: The Housing Market of Jos, Nigeria," Urban Studies, Urban Studies Journal Limited, vol. 26(5), pages 486-494, October.
    4. G. Stacy Sirmans & C.F. Sirmans, 1991. "Rents, Selling Prices and Financing Premiums," Urban Studies, Urban Studies Journal Limited, vol. 28(2), pages 267-276, April.

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