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FHA/VA Financing and Price Discounts

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  • Paul K. Asabere

    () (Temple University Philadelphia, PA 19122)

  • Forrest Huffman

    () (Temple University Philadelphia, PA 19122)

Abstract

This 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.

Suggested Citation

  • Paul K. Asabere & Forrest Huffman, 2008. "FHA/VA Financing and Price Discounts," Journal of Real Estate Research, American Real Estate Society, vol. 30(2), pages 191-206.
  • Handle: RePEc:jre:issued:v:30:n:2:2008:p:191-206
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    References listed on IDEAS

    as
    1. David Genesove & Christopher Mayer, 2001. "Loss Aversion and Seller Behavior: Evidence from the Housing Market," The Quarterly Journal of Economics, Oxford University Press, vol. 116(4), pages 1233-1260.
    2. Asabere, Paul K & Huffman, Forrest E, 1993. "Price Concessions, Time on the Market, and the Actual Sale Price of Homes," The Journal of Real Estate Finance and Economics, Springer, vol. 6(2), pages 167-174, March.
    3. Curtis R. Taylor, 1999. "Time-on-the-Market as a Sign of Quality," Review of Economic Studies, Oxford University Press, vol. 66(3), pages 555-578.
    4. Rosenthal, Stuart S. & Duca, John V. & Gabriel, Stuart A., 1991. "Credit rationing and the demand for owner-occupied housing," Journal of Urban Economics, Elsevier, vol. 30(1), pages 48-63, July.
    5. Anthony Pennington-Cross & Joseph Nichols, 2000. "Credit History and the FHA-Conventional Choice," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 28(2), pages 307-336.
    6. Abdullah Yavaş, 1992. "A Simple Search and Bargaining Model of Real Estate Markets," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 20(4), pages 533-548.
    7. Paul K. Asabere & Forrest E. Huffman & Seyed Mehdiany, 1992. "The Price Effects of Cash versus Mortgage Transactions," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 20(1), pages 141-154.
    8. Zerbst, Robert H & Brueggeman, William B, 1977. "FHA and VA Mortgage Discount Points and Housing Prices," Journal of Finance, American Finance Association, vol. 32(5), pages 1766-1773, December.
    9. Abdullah Yavas & Shiawee Yang, 1995. "The Strategic Role of Listing Price in Marketing Real Estate: Theory and Evidence," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 23(3), pages 347-368.
    10. Hendershott, Patric H. & LaFayette, William C. & Haurin, Donald R., 1997. "Debt Usage and Mortgage Choice: The FHA-Conventional Decision," Journal of Urban Economics, Elsevier, vol. 41(2), pages 202-217, March.
    11. Goodman, John Jr. & Nichols, Joseph B., 1997. "Does FHA Increase Home Ownership or Just Accelerate It?," Journal of Housing Economics, Elsevier, vol. 6(2), pages 184-202, June.
    12. Gwilym Pryce & Kenneth Gibb, 2006. "Submarket Dynamics of Time to Sale," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 34(3), pages 377-415, September.
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    JEL classification:

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

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