Discount Point Concessions and the Value of Homes with Conventional Versus Non-Conventional Mortgage Financing

Abstract

This is an empirical investigation on the impacts of certain seller concessions on home prices. Specifically, we examine the impacts of two seller concessions: discount point concessions (DPC's) and closing cost concession (CCC's) on home prices. Using hedonic analysis, we find that DPC's are capitalized into home prices. We do not find that CCC's produce capitalization effects. DPC's appear to work in a manner similar to other creative financing technique such as a buydown mortgage. DPC's enhance affordability by lowering interest costs and debt service payments. DPC's thus lead to increases in effective demand. CCC's will reduce out of pocket expenses but will not necessarily enhance long term affordability, thus their price effects are less certain. We show that these price premiums are prevalent only when conventional mortgage financing is used. When FHA and VA loans are used premiums disappear. Of course, governmental insured/guaranteed loans are much more subject to regulation than conventional loans which may prevent homesellers from price premium maximization. The study establishes the relative significance of discount points versus closing costs as marketing incentives. It appears that the use of discount points as a marketing incentive produces more capitalization effects. The presence of such capitalization effects if consistent with results found in other creative financing studies.