Discount Point Concessions and the Value of Homes with Conventional versus Nonconventional Mortgage Financing

Discount Point Concessions and the Value of Homes with Conventional versus Nonconventional... This is an empirical investigation on the impacts of certain seller concessions on home prices. Specifically, we examine the impacts of two seller concessions: discount point concessions (DPCs) and closing cost concessions (CCCs) on home prices. Using hedonic analysis, we find that DPCs are capitalized into home prices. We do not find that CCCs produce capitalization effects. DPCs appear to work in a manner similar to other creative financing techniques such as a buydown mortgage. DPCs enhance affordability by lowering interest costs and debt service payments. DPCs thus lead to increases in effective demand. CCCs will reduce out of pocket expenses but will not necessarily enhance long-term affordability, thus their price effects are less certain. We show that these price premiums are prevalent only when conventional mortgage financing is used. When FHA and VA loans are used, premiums disappear. Of course, governmental insured/guaranteed loans are much more subject to regulation than conventional loans, which may prevent homesellers from price premium maximization. The study establishes the relative significance of discount points versus closing costs as marketing incentives. It appears that the use of discount points as a marketing incentive produces more capitalization effects. The presence of such capitalization effects is consistent with results found in other creative financing studies. The Journal of Real Estate Finance and Economics Springer Journals

Discount Point Concessions and the Value of Homes with Conventional versus Nonconventional Mortgage Financing

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Kluwer Academic Publishers
Copyright © 1997 by Kluwer Academic Publishers
Economics; Regional/Spatial Science; Financial Services
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