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

Austin Kelly

Urban/Regional from University Library of Munich, Germany

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.

JEL-codes: R (search for similar items in EconPapers)
Date: 1994-12-22, Revised 1994-12-24
Note: 12 ASCII pages followed by 3 zipped encapsulated postscript graph files, both uuencoded.
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