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3 Housing Fin. Rev. 119 (1984)
Creative Financing and House Prices: A Study of Capitalization Effects

handle is hein.journals/hsnfnrv3 and id is 119 raw text is: Creative Financing and House Prices: A Study of Capitalization Effects by Kenneth T. Rosen* The last three years have seen a dramatic restructuring of the housing finance system in California and throughout the nation. This restructuring is a function of the interaction of market conditions and a strong dereg- ulation effort on the part of the federal government. Market conditions have been characterized by extraordinarily high and volatile short- and long-term interest rates. The volatility and the upward trend in interest rates have made it extremely difficult for traditional mortgage lenders to create and hold long-term fixed-rate mortgages profitably. At the same time, high mortgage rates have made homeownership prohibitively expensive for most first-time entrants to the California housing market. The result of these market conditions has been a phenomenal growth of creative financing arrangements. The major mechanism of creative financing of existing houses occurs through the assumption (transfer) of an existing low-rate mortgage loan by the buyer from the seller and usually involves the provision by the seller of a first, second and/or third mortgage loan, often at below-market rates. The extent of these techniques for financing existing home sales has been estimated to have been as high as 75 percent of all transactions in California in 1982. This study concerns the impact of creative financing on house prices. Given that creative financing involves below-market interest rates, at least a portion of these discounts should, theoretically at least, be reflected in higher housing prices. The major purpose of this study is to examine the extent to which below-market-rate financing is capitalized in higher housing prices. University of California, Berkeley. Housing Finance Review, April 1984, vol. 3, no. 2 © 1984 by the Federal Home Loan Mortgage Corporation.

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