Abstract
Given the long term secular decline in interest rates, assumable financing has been of little concern for decades. But given both the growth of loans insured by the Federal Housing Administration (“FHA”) and recent increase in interest rates, this situation is likely to change very soon. Using data from California, we first document the dramatic increase in FHA-insured loans since 2007. We then derive the theoretical impact of capitalizing assumable financing into house prices as interest rates increase and simulate the effect on prices of homes sold with assumable FHA financing. Results are economically significant and likely to partially offset declines in house prices associated with higher mortgage rates. Findings imply that appraisers will need to adjust comparable sales to reflect FHA loan assumptions.
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