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

Listed author(s):
  • Austin Kelly

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

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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.

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Paper provided by EconWPA in its series Urban/Regional with number 9412001.

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Length: 12 pages
Date of creation: 22 Dec 1994
Date of revision: 24 Dec 1994
Handle: RePEc:wpa:wuwpur:9412001
Note: 12 ASCII pages followed by 3 zipped encapsulated postscript graph files, both uuencoded.
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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. 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.
  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.
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