Journal of Real Estate Finance and Economics, 17:3, 263±278 (1998)
# 1998 Kluwer Academic Publishers, Boston. Manufactured in The Netherlands.
Reexamining the Price Effects of Assumption
Financing: The Case of Above-Market Interest Rates
MARCUS T. ALLEN
Department of Finance and Real Estate, College of Business, Florida Atlantic University, Fort Lauderdale,
THOMAS M. SPRINGER
Department of Finance and Real Estate, College of Business, Florida Atlantic University, 777 Glades Road,
Boca Raton, FL 33431
Although previous research addresses the price effects of below-market loan assumptions in housing transactions,
no direct evidence exists regarding the price effects of above-market loan assumptions. This study develops a
hypothesis of strictly nonnegative price effects in assumption ®nancing and empirically documents a positive
impact in housing transactions involving above-market loan assumptions. Based on a switching regimes
regression analysis of 2,669 single-family house transactions, we ®nd evidence of a signi®cant price premium in
moderately priced homes involving above-market loan assumptions but no evidence for a ®nancing premium for
more expensive homes. The results suggest that the sources of the premium in the moderately priced home market
are the assuming buyer's motivations to minimize transactions costs and to avoid lenders' quali®cation criteria.
Key Words: assumable mortgages, housing prices
Assumable mortgage loans have long played an important role in the residential real estate
marketplace. Motivated by the relatively higher mortgage interest rates of the late 1970s
and early 1980s, numerous researchers have examined the price effects of below-market
loan assumptions in housing transactions. In general, the results of these studies document
signi®cant selling price premiums associated with the assumption strategy and attribute
these premiums to the interest savings afforded to the assuming buyer.
Given the lower interest-rate environment of the early 1990s, the incidence of below-
market loan assumptions has declined signi®cantly in recent years.
On the other hand, the
relatively low interest-rate environment during the early part of this decade provides an
opportunity to evaluate the impact of above-market loan assumptions on housing prices.
The analysis presented in this study suggests that loan assumption remains a viable
strategy, with some buyers choosing to assume existing loans even though the loans may
carry above-market interest rates.
Previous research shows that below-market interest rates on assumed loans result in
price premiums that are, at least in part, determined by interest savings afforded to the