Working Paper: NBER ID: w1695
Authors: Donald R. Haurin; Patric H. Hendershott
Abstract: The typical methodology in valuing seller financing consists of calculating a discount -- the present value of the after-tax interest savings due to the creative financing --and including this variable, along with other characteristics of the purchased house, in an hedonic price equation explaining the house price actually paid. Resulting from this equation is a set of marginal prices corresponding to each characteristic of the house, including the quantity (discount) of creative finance accompanying the house. The central question usually addressed is whether the discount is fully capitalized in the value of the house -- whether the price of creative finance is unity. In our view, one should not ask what the price of creative finance is because this price, like that of other housing attributes, likely depends upon supply and demand conditions. We develop and estimate a model incorporating this dependency.
Keywords: Seller Financing; Housing Affordability; Hedonic Pricing
JEL Codes: G21; R21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| affordability (a) (R31) | price of creative financing (G19) |
| percentage reduction in initial monthly payment (G51) | price of creative financing (G19) |
| aggregate demand and supply conditions (E00) | price of creative financing (G19) |
| affordability is a significant issue (R21) | demand for creative financing (G19) |
| demand for creative financing (G19) | price of creative financing (G19) |
| macroeconomic variables (E19) | real price of housing (R31) |
| rental costs and mortgage rates (R31) | real price of housing (R31) |