Reexamining the Price Effects of Assumption Financing: The Case of Above-Market Interest Rates

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Abstract

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 financing 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 find evidence of a significant price premium in moderately priced homes involving above-market loan assumptions but no evidence for a financing 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’ qualification criteria.

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