IDEAS home Printed from https://ideas.repec.org/p/wpa/wuwpur/9412001.html
   My bibliography  Save this paper

Capitalization of Above Market Financing - or, A Tale of 2 Condos

Author

Listed:
  • Austin Kelly

    (U.S. General Accounting Office, 202-512-4940)

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. Thus, the buildings provide a natural experiment to isolate the capitalization of financing terms. With no need to control for neighborhood or structure type differences, and no possibility for differences in mortgage terms to be systematically varied by a seller of new units, the research provides the cleanest estimate to date of the impact of financing terms on sales price. Prices for units in the co-op are found to fluctuate with the value of the prepayment lockout. Unlike most previous research, which relied on the Cash Equivalence method of valuing mortgage terms, the value of the prepayment lockout is estimated, using a stochastic simulation, as a function of the level of interest rates, rate volatility, and the time remaining on the lockout provision. This research finds a result different from the existing literature, as the value of the lockout seems to be overcapitalized in the price of the co-op units. Additionally, co- op status is found to reduce the value of apartments by about 9% relative to condo status.

Suggested Citation

  • Austin Kelly, 1994. "Capitalization of Above Market Financing - or, A Tale of 2 Condos," Urban/Regional 9412001, University Library of Munich, Germany, revised 24 Dec 1994.
    • Handle: RePEc:wpa:wuwpur:9412001
    Note: 12 ASCII pages followed by 3 zipped encapsulated postscript graph files, both uuencoded.
    as

    Download full text from publisher

    File URL: https://econwpa.ub.uni-muenchen.de/econ-wp/urb/papers/9412/9412001.pdf
    Download Restriction: no
    File URL: https://econwpa.ub.uni-muenchen.de/econ-wp/urb/papers/9412/9412001.ps.gz
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    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, March.
    2. Thomas D. Berry & Adam K. Gehr, 1985. "FNMA Mortgage Purchase Commitments As Put Options: An Empirical Examination," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 13(1), pages 93-106, March.
    3. 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.
    4. Arden R. Hall, 1985. "Valuing the Mortgage Borrower's Prepayment Option," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 13(3), pages 229-247, September.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. 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.
    2. Lim, Terence & Lo, Andrew W. & Merton, Robert C. & Scholes, Myron S., 2006. "The Derivatives Sourcebook," Foundations and Trends(R) in Finance, now publishers, vol. 1(5–6), pages 365-572, April.
    3. Patric H. Hendershott, 1986. "Mortgage Pricing: What Have We Learned So Far?," NBER Working Papers 1959, National Bureau of Economic Research, Inc.
    4. Mariya Letdin & Hyoung S. Shim, 2019. "Location choice, life cycle and amenities," Journal of Regional Science, Wiley Blackwell, vol. 59(3), pages 567-585, June.
    5. Dinan, Terry Marie, 1984. "Obtaining the optimal fuel conserving investment mix: a linear programming-hedonic technique approach," ISU General Staff Papers 198401010800009157, Iowa State University, Department of Economics.
    6. Childs, Paul D. & Ott, Steven H. & Riddiough, Timothy J., 1996. "The value of recourse and cross-default clauses in commercial mortgage contracting," Journal of Banking & Finance, Elsevier, vol. 20(3), pages 511-536, April.
    7. Bergstrom, John C., 1998. "Exploring And Expanding The Landscape Values Terrain," Faculty Series 16653, University of Georgia, Department of Agricultural and Applied Economics.
    8. Werner Hürlimann, 2012. "Valuation of fixed and variable rate mortgages: binomial tree versus analytical approximations," Decisions in Economics and Finance, Springer;Associazione per la Matematica, vol. 35(2), pages 171-202, November.
    9. Delores Conway & Christina Li & Jennifer Wolch & Christopher Kahle & Michael Jerrett, 2010. "A Spatial Autocorrelation Approach for Examining the Effects of Urban Greenspace on Residential Property Values," The Journal of Real Estate Finance and Economics, Springer, vol. 41(2), pages 150-169, August.
    10. Messonnier, Mark L. & Luzar, E. Jane, 1990. "A Hedonic Analysis Of Private Hunting Land Attributes Using An Alternative Functional Form," Southern Journal of Agricultural Economics, Southern Agricultural Economics Association, vol. 22(2), pages 1-7, December.
    11. Ghoddusi, Hamed & Afkhami, Mohamad, 2019. "Valuation of mortgage interest deductibility under uncertainty: An option pricing approach," Journal of Economic Dynamics and Control, Elsevier, vol. 103(C), pages 102-122.
    12. Yu Wang & David Shaw & Ke Yuan, 2018. "Gated Neighborhoods, Privatized Amenities and Fragmented Society: Evidence from Residential Experience and Implications for Urban Planning," Sustainability, MDPI, vol. 10(11), pages 1-20, November.
    13. Saudamini Das & Arup Mitra & Rajnish Kumar, 2017. "Do neighbourhood facilities matter for slum housing? Evidence from Indian slum clusters," Urban Studies, Urban Studies Journal Limited, vol. 54(8), pages 1887-1904, June.
    14. Patric H. Hendershott & Robert Van Order, 1987. "Pricing Mortgages: An Interpretation of the Models and Results," NBER Working Papers 2290, National Bureau of Economic Research, Inc.
    15. Karen Fierro & Thomas Fullerton & K. Donjuan-Callejo, 2009. "Housing Attribute Preferences in a Northern Mexico Metropolitan Economy," Atlantic Economic Journal, Springer;International Atlantic Economic Society, vol. 37(2), pages 159-172, June.
    16. Paoyu Huang & Chih-Te Yang & Yuhsin Chen & Yensen Ni, 2023. "A New Look on the Profitability of Fixed and Indexed Mortgage Products," Mathematics, MDPI, vol. 11(17), pages 1-16, August.
    17. Biao Sun & Shan Yang, 2020. "Asymmetric and Spatial Non-Stationary Effects of Particulate Air Pollution on Urban Housing Prices in Chinese Cities," IJERPH, MDPI, vol. 17(20), pages 1-23, October.
    18. Ben C. Arimah, 1992. "Hedonic Prices and the Demand for Housing Attributes in a Third World City: The Case of Ibadan, Nigeria," Urban Studies, Urban Studies Journal Limited, vol. 29(5), pages 639-651, June.
    19. B C Arimah, 1994. "The Income Elasticity of Demand in a Sub-Saharan African Housing Market: Evidence from Ibadan, Nigeria," Environment and Planning A, , vol. 26(1), pages 107-119, January.
    20. Eugenio Figueroa & George Lever, 1992. "Determinantes del Precio de Mercado de los Terrenos en el Área Urbana de Santiago," Latin American Journal of Economics-formerly Cuadernos de Economía, Instituto de Economía. Pontificia Universidad Católica de Chile., vol. 29(86), pages 99-114.

    More about this item

    JEL classification:

    • R - Urban, Rural, Regional, Real Estate, and Transportation Economics

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:wpa:wuwpur:9412001. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: EconWPA (email available below). General contact details of provider: https://econwpa.ub.uni-muenchen.de .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.