Affordability and the Value of Seller Financing
The typical methodology in valuing seller financing consists of calculating a discount -- the present value of the after-tax interest savings due to the creative financing --and including this variable, along with other characteristics of the purchased house, in an hedonic price equation explaining the house price actually paid. Resulting from this equation is a set of marginal prices corresponding to each characteristic of the house, including the quantity (discount) of creative finance accompanying the house. The central question usually addressed is whether the discount is fully capitalized in the value of the house -- whether the price of creative finance is unity. In our view, one should not ask what the price of creative finance is because this price, like that of other housing attributes, likely depends upon supply and demand conditions. We develop and estimate a model incorporating this dependency.
|Date of creation:||Sep 1985|
|Date of revision:|
|Publication status:||published as Maurin, Donald R. and Patric H. Hendershott. "Affordability and the Valueof Creative Finance: An Application to Seller Financed Transactions." Housing Finance Review, Vol.5, No.3, (Winter 1986), pp. 189-206.|
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- Rosen, Sherwin, 1974. "Hedonic Prices and Implicit Markets: Product Differentiation in Pure Competition," Journal of Political Economy, University of Chicago Press, vol. 82(1), pages 34-55, Jan.-Feb..
- Patric H. Hendershott & James D. Shilling & Kevin E. Villani, 1983. "Measurement of the Spreads Between Yields on Various Mortgage Contracts and Treasury Securities," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 11(4), pages 476-490.
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