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Capitalization of Above Market Financing: Condos and Co-ops

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Abstract

Prices and characteristics were collected for two similar, adjacent buildings. One building, a co-op, has a master mortgage with a prepayment lock-out, while the other building, a condo, has no master mortgage. They provide a natural experiment to isolate the capitalization of financing terms. The research provides the clearest demonstration to date of the impact of financing terms on sales price. The value of the prepayment lock-out is estimated, using a stochastic simulation, as a function of the level of interest rates, rate of volatility, and time remaining on the lock-out provision. Prices for co-op units are found to fluctuate with the value of the prepayment lock-out. The value of the lock-out is overcapitalized in the price of co-op units. Co-op status reduces the value of apartments by about 9%.

Suggested Citation

  • Austin Kelly, 1998. "Capitalization of Above Market Financing: Condos and Co-ops," Journal of Real Estate Research, American Real Estate Society, vol. 15(2), pages 163-176.
  • Handle: RePEc:jre:issued:v:15:n:2:1998:p:163-176
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    References listed on IDEAS

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    1. Wai K. Leung & C. F. Sirmans, 1990. "A Lattice Approach to Pricing Fixed-Rate Mortgages with Default and Prepayment Options," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 18(1), pages 91-104.
    2. White, Halbert, 1980. "A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity," Econometrica, Econometric Society, vol. 48(4), pages 817-838, May.
    3. Coulson, N. Edward, 1989. "The empirical content of the linearity-as-repackaging hypothesis," Journal of Urban Economics, Elsevier, vol. 25(3), pages 295-309, May.
    4. Blomquist, Glenn & Worley, Lawrence, 1981. "Hedonic prices, demands for urban housing amenities, and benefit estimates," Journal of Urban Economics, Elsevier, vol. 9(2), pages 212-221, March.
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    Cited by:

    1. Silje Eretveit & Theis Theisen, 2016. "Efficiency and Justice in the Market for Cooperative Dwellings," International Real Estate Review, Asian Real Estate Society, vol. 19(3), pages 297-326.
    2. Michael H. Schill & Ioan Voicu & Jonathan Miller, 2007. "The Condominium versus Cooperative Puzzle: An Empirical Analysis of Housing in New York City," The Journal of Legal Studies, University of Chicago Press, vol. 36(2), pages 275-324, June.
    3. Karl Robertsen & Theis Theisen, 2011. "The Impact of Financial Arrangements and Institutional Form on Housing Prices," The Journal of Real Estate Finance and Economics, Springer, vol. 42(3), pages 371-392, April.

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    JEL classification:

    • L85 - Industrial Organization - - Industry Studies: Services - - - Real Estate Services

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