Capitalization of Above Market Financing: Condos and Co-ops
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%.
Volume (Year): 15 (1998)
Issue (Month): 2 ()
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References listed on IDEAS
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- 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.
- 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.
- White, Halbert, 1980. "A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity," Econometrica, Econometric Society, vol. 48(4), pages 817-38, May.
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