Selling price, financing premiums, and days on the market

Journal of Real Estate Finance and Economics, 2:209-222 (1989) �9 1989 Kluwer Academic Publishers

Selling Price, Financing Premiums, and Days on the Market

EURICO J. FERREIRA Associate Professor of Finance, 320 Sirrine Hall, Clernson University, Clernson, South Carolina 29634-1323

G. STACY SIRMANS Associate Professorf of Real Estate, Department of Insurance, Real Estate, and Business Law, The Florida State University

Abstract

Home buyers face the task of trading off selling price and the time required to sell a property. One factor that may affect this decision is the presence of financing premiums. The effects of financing premiums on the time a single-family home remains on the market is examined in this paper. The question is to what extent home sellers are willing to compromise on financing premiums and make concessions to buyers in order to sell their properties more quickly.

The study uses a sample of single-family residential homes sold with assumption financing and new conventional financing. The sample covers segments of time when interest rates were relatively low and stable (1975-1976) and when rates were much higher on average and more volatile (1980).

The results show that financing premiums were present in selling prices of assumption-financed home sales during the 1975-1976 period and that sellers were able to capture a premium and maintain the same average time on the market as properties with other types of financing. During a period of un- favorable market conditions, such as 1980, the results indicate that home sellers with assumption financing conceded or negotiated away any premium in order to significantly decrease the number of days their properties stayed on the market for sale.

I. Introduction

H o m e sel lers t r a d e of f se l l ing p r i ce a n d the l e n g t h o f t ime r e q u i r e d to sel l a p r o p e r - ty. A s T r i p p i (1977) a n d M i l l e r (1978) p o i n t out , the se l le r faces two con f l i c t i ng ob - jec t ives : (1) m a x i m i z i n g se l l ing pr ice , a n d (2) m i n i m i z i n g se l l ing t ime. B o t h v a r i a b l e s a re i n f l u e n c e d b y p h y s i c a l a spec t s o f the p r o p e r t y such as size, l o c a t i o n , age, qua l i t y o f c o n s t r u c t i o n , etc. Al so , a m a j o r c o n c e r n o f the se l l e r in e s t a b l i s h i n g a l i s t ing p r i ce is its i m p a c t o n b o t h the se l l ing p r i ce a n d t ime o n the marke t . T h u s as M i l l e r a n d S k l a r z (1988) e x p l a i n , the h o m e o w n e r is s e e k ing to m a x i m i z e the p r e s e n t v a l u e o f the ne t se l l ing p r i ce b a s e d o n h i s / h e r o p p o r t u n i t y cos t o f t ime.

210 EURICO J. FERREIRA AND G. STACY SIRMANS

The literature shows varying relationships between time on the market and selling price. Trippi (1977) finds a positive relationship between price and time on the market. Cubbins (1974) concludes that a house can be sold faster the higher the price attached to it. Belkin, Hempel, and McLeavey (1976) show that the proportion of list price realized by the seller diminishes with time on the market. Miller (1978) finds an inverse relationship between price concessions and time on the market. Allen, Shilling, and Sirmans (1987) find no statistically significant relationship between marketing time and selling price.

Another possible complicating factor in the tradeoff of liquidity and selling price is the presence of creative financing premiums. A reduction in sales of single-family homes due to high market interest rates during the late 1970s and early 1980s increased the use of various financing innovations. These creative financing techniques generally included mortgage contracts at below-market interest rates with a premium charged for this favorable financing. Examples would include assumption financing, buydowns, and seller financing at below-market interest rates. An important issue in the literature has been the extent to which these premiums are capitalized into selling prices.

Several studies (see, for example Bible and Crunkleton (1983), Clauretie (1984), and Rosen (1984) show that the financing premium using the traditional cash equivalence method should be fully capitalized into the house selling price; otherwise, a home buyer could acquire a house with a below-market assumption (for example, at a lower financing cost than an otherwise identical house with a new conventional loan). However, studies which have empirically measured the capitalization rates of various types of creative financing (Corgel and Goebel, (1983), Ferreira and Sirmans (1986), Hubert and Mann (1984), Sirmans, Smith, and Sirmans (1983), and Smith, Sirmans, and Sirmans (1984)) have shown, for numerous submarkets, that houses have been sold with premiums but without the full cash equivalence value being paid. Still another study (Gaines, Ingram, and Gregory (1983)) shows no significant premium being capitalized for a sample of assumption-financed properties. Other studies have attempted to explain this less- than-complete capitalization (Ferreira and Sirmans (1984), Ferreira and Sirmans (1985), Sirmans, Sirrnans, and Smith (1986), and Smith, Sirmans, and Sirmans (1984).

Although numerous studies have attempted to measure the extent to which financing premiums are capitalized into house prices or develop models to value these premiums, no previous research has examined any potential association between financing premiums and days on the market. The question addressed in this paper is to what extent sellers are willing to compromise on financing premiums and make concessions to buyers in order to sell their properties more quickly. Two time periods representing periods of differing interest rate levels and volatility are examined.

SELLING PRICE, FINANCING PREMIUMS, AND DAYS ON THE MARKET 211

2. Financing premiums and days on the market

For a given market, in general, the number of days a house stays on the market is primarily a function of two variables: (1) the relationship between listing and selling price, and (2) the average conventional mortgage rate during the time the property is offered for sale. Home sellers do not know beforehand the exact price at which the property will be sold, but it is likely that the higher the listing price relative to the actual selling price, the longer the property will remain on the market. Moreover, when mortgage rates are relatively high and unstable, the number of days required to sell a property should be greater relative to the number of days observed for a scenario of comparatively low and stable market interest rates.

2.1. Market value and time on the market

Figure 1 depicts the expected association between the number of days a house stays on the market (DMKT) and the proportion between a property's listing price and its true value (LP/V). l Figure 1 shows that if the property is listed at a price equal to its actual true value, LP/V is equal to 1.00 and DMKT is expected to be equal to point a. Also, there is likely to be some reasonable range around V in which the property can be sold in a reasonable time. 2 Thus, if the property is listed at a price outside this reasonable range such that LP/V is equal to or greater than some upper limit, UL, the property would remain on the market indefinitely. Alter- natively, there should be some list price at which the property would sell im- mediately. This point is represented by LL. Traditionally, LP/SP (where SP is selling price and assumed equal to the true value) is greater than one, since sellers are likely to perceive this price range in which the property can be listed and sold within a reasonable time. Thus they would prefer to err on the high side so as not to preclude the highest possible bid in this range. As a result, sellers may systematically establish higher initial listing prices. In a competitive market, this should result in a longer time on the market.

The time required to sell a property would also be related to market conditions such as current levels of mortgage rates. Sluggish housing markets are characteris- tic of periods of high and volatile interest rates. As rates go up, potential buyers are forced out of the market due to qualifying rules, thus reducing the demand for housing. Even though some buyers settle for purchasing less housing, buyers in general seek to maximize housing consumption; hence, they defer purchases. The same is true for markets of highly volatile rates. Potential buyers tend to defer purchases of houses with the expectation of lower future rates. Since high volatility is associated with higher relative levels of interest rates, the combined effect is a longer time to sell a property in general. For the market considered in this study, it


LL UL

LIST PRICE/SELLINO PRICE

Fig. 1. Relationship between time on the market and the list and selling price ratio.

was found that the time on the market in the lower and more stable interest rate envi ronment o f 1976-1977 was lower (53.93 days) than the time for the less favorable env i ronment of 1980 (104 days) for propert ies with new convent ional loans.

High levels and volatility o f mortgage interest rates have increased the demand for unconvent iona l sources of f inancing in home buying over recent years. As pre- viously noted, the value o f this f inancing is usually created by a below-market interest rate and has been found to be capital ized into selling prices of properties. Previous research has examined the effect of f inancing premiums on selling price, but no studies have examined the effect of f inancing premiums on the length of time a proper ty stays on the market or the combined effect of these factors. To ex- amine these relationships, we use a sample of single-family residential home sales from two periods: 1976-1977 and 1980. These periods represent segments of t ime when interest rates were relatively low and stable (1976-1977) a n d w h e n rates were much higher on average and more volatile (1980). The two time periods allow us to


determine the effect of financing premiums on days on the market in relatively stable periods, and also to determine whether financing premium concessions are utilized by sellers to reduce selling time in periods of higher and relatively unstable interest rates. In these periods creative financing is much more important as more people are excluded from the institutional financial market.

2.2 Prices and selling t ime

The actual selling price (SP~) of a property with a new conventional mortgage should be equal to the listing price (LP~) minus some average difference (DIF) which is assumed to be a negotiating buffer greater than zero, i.e.,

SPc = LPc - DIF. (1)

Thus a property with a listing price that includes a negotiation buffer of the average difference should remain on the market for the average time, other things being equal. Likewise a property sold with assumption financing that has a listing price (LPa) equal to the actual selling price for a conventional sale (SPc) plus the average difference (DIF), and plus the appropriate financing premium (PREM), should remain on the market for the same average number of days, other things being equal. That is,

SP~ = LPa - D I F - P R E M . (2)

In addition, the selling price (SPa) of a property with assumption financing should be equal to SPc plus the appropriate financing premium, i.e.,

S P a = SPc + P R E M . (3)

The financing premium would affect the ratio of listing price to selling price but not the days on the market. 3 A greater proportion of listing price could not be captured in the selling prices of properties with assumption financing relative to the proportion for properties with new conventional financing. Thus, according to' Figure 1, for identical properties that differ only with respect to financing, equation (4) must hold:

LPa _ LPc SPa SPc

(4)

In order for equation (4) to hold, a greater premium must be incorporated into L P a than is capitalized into the selling price (SPa). Other things being equal, the lower the financing premium incorporated into SPa, the lower the value o f S P J S P c . A seller holding the average property with assumption financing and willing to concede a


portion (or all) of the financing premium should experience a shorter selling time.

A numerical example will clarify this analysis. Suppose that a house can be sold for $80,000 with a new conventional mortgage, and it is listed for $83,200. Ad- ditionally assume that the house has an assumable mortgage with a current cash equivalence value of $2,000. If this house is listed with the assumption financing premium of $2,000 incorporated into its list price, then LPa is $85,200. If the same premium is reflected its selling price, then SPa is equal to $82,000. In this case, LPa/SPa = 1.039 and LPc/SPc = 1.040, which shows that LPJSPa < LPJSPc, so equation (4) does not hold.

Nevertheless, equation (4) must hold in order for Figure 1 to be valid. The results in Table 1 confirm that equation (4) does hold and that Figure 1 is valid by show- ing the same LP/SP ratio for conventionals and assumptions. But, in this case, either LPa must be higher for the same SP~, or SPa must be lower for the same LPa. Using the above example as illustration, if home buyers opt for the latter alterna- tive, the financing premium in SPa must be $1,923 and not $2,000. In this case, LPJSP~ will be equal to 1.040, and equation (4) will hold.

Of course, this strategy would allow the seller the option of either experiencing the same average time on the market as sales with conventional financing by in- corporating such a required amount ofPREMinto SP~, or lessening the time on the market by reducing the financing premium incorporated into LPa and SP~

3. Explaining days on the market

Data were collected from a submarket in the Greater Greenville, South Carolina area. These included 117 observations for the 1976-1977 period, of which 51 were assumptions and 66 were new conventional loans, and 120 observations for the 1980 period, of which 68 were assumptions and 62 were new conventionals loans. To reduce the bias of such factors as location, only houses located in a particular subdivision of average-priced family residences were considered.

As indicated in Table 1, between January 1976 and April 1977 the average sale price with new conventional loans was $37,161, with standard deviation of $13,349 and minimum and maximum values, respectively, of $16,000 and $82,000. The average sale price with loan assumptions was $38,778, with a standard deviation of $14,403 and minimum and maximum values, respectively, of $14,000 and $88,000. For January through December, 1980, the average sale price with new conventional loans was $52,715, with a standard deviation of $15,148 and minimum and maximum values, respectively, of $31,500 and $88,000. The average sales price with assumptions was $50,839, with a standard deviation of $16,405 and minimum and maximum values, respectively of $28,500 and $91,500.

To explain days on the market, the following relation is used: a logarithmic transformed linear regression model of equation (5) along with the hedonic model in a two-stage least squares procedure. Equation (5) is

DMKT = a e b(LP/sP) (5)


Table 1. Summary statistics for LP, SP, DIF, DMKT and CMR

Conventional (76)

Standard Minimum Maximum Variable Mean Deviation Value Value

SP ($) 37,161.00 13,349.00 16,000.00 82,000.00 LP ($) 38,448.00 13,703.73 17,500.00 86,500.00 LP/SP 1.04 0.04 0.98 1.19 DMKT (days) 53.93 44.68 4.00 219.00 CMR (%) 9.21 0.15 8.94 9.48

Assumption (76)



Conventional (80)



Assumption (80)


SP ($) 50,839.00 16,405.00 28,500.00 91,500.00 LP ($) 52,860.00 16,762.00 31,500.00 93500.00 LP/SP 1.04 0.04 0.99 1.23 DMKT (days) 66.30 93.23 1.00 640.00 CMR (%) 11.62 1.15 9.39 14.43


where

D M K T = the number of days on the market LP/SP = the proportion of listing price to selling price

Equation (5) says that the time on the market is an exponential function of the list price relative to the value of the property, and that those variables are positively related. 4 Moreover, if the time on the market is also a function of the current market rate a logarithmic transformed form of equation (5) is given by

In D M K T = In a + b ( L P / S P ) + c C M R (6)

where In D M K T is the natural log of the number of days on the market, and CMR is the average conventional mortgage rate for a given unit. Equation (6) should pre- vail under an economic scenario of high and unstable interest rates. The average conventional mortgage rate is the average value between the existing conventional mortgage rate at the time the house is listed and the rate at the time the house is sold. Equation (6) is estimated in a two-stage least squares system with a logarithmic transformed hedonic pricing model. 5 Our interest is to determine whether financing premiums are present and to what extent they are used as concessions in achieving shorter selling times. The hedonic pricing model for houses witb assumable loans is of the form

In Price = In bo + b~ In B D R M + b2 In B T H + b 3 B M T

-I- b 4 In A G E + b5 A C + b 6 FP

+ b7 GAR + b8 In D M K T + b 9 In PREMic (7)

w h e r e

B D R M = the number of bedrooms B T H = the number of bathrooms BMT = basement (l=yes, 0--no) A G E = the age of the property

A C = central air conditioning (1=yes, 0= no) FP = fireplace (l=yes, 0=no)

GAR = garage (l=yes, 0=no) D M K T = the number of days on the market P R E M = the cash equivalent financing premium

The model is applied to listing price and selling price and the results are in columns three and four of Table 2. These results show that a positive premium is reflected in the list price and the selling price for assumption properties for the 1975-1976 period. The coefficient of the financing premium (In PREM) in the LP and SP equations is, respectively, 0.02 and 0.01.


The results of equation (6) for the 1975-1976 period considering only sale prices of houses sold with new conventional loans are given in Table 2, column one. The significant coefficient onLP/SP indicates that the time this type of house stayed on the market was affected by the initial list price, since the greater the difference between the list price and sale price, the longer the days on the market. 6 The coefficient of CMR is not significant, indicating that the average conventional mortgage rate had no effect on time on the market.

Applying equation (6) to houses with assumable mortgages for the 1975-1976 period provides similar results, i.e., the number of days on the market was significantly affected by the relationship of listing and selling price but was not affected by the interest rate.

Summary statistics in Table 1 show an interesting scenario for the 1975-1976 period. Note that the proportion of selling price to listing price is the same for conventionals and assumptions (1.04). The results in Table 2 for the hedonic model confirm that a significant premium for financing was reflected in both the listing price and selling price for 1975-1976. It appears that in this period of stable interest rates; sellers were able to capture a premium for financing and still sell their properties for about the same average length of time as properties with conventional financing. The actual average time on the market for conventional sales was 54 days, compared to 57 days for assumptions. In other words, the results show that if the same average DIF is conceded with assumptions as with conventionals, the market recognized the financing premium, and sellers did not have to negotiate away the premium to achieve the average selling time. In relation to equation (4), the fact that the same average LP/SP ratio is observed for both types of financing implies that a larger premium was built into the listing price than was captured in the selling price. The results also suggest that when equation (6) is applied to houses sold with assumption financing, sellers could have sold their houses more quickly by reducing their listing pr ices . 7

4. Interest rates and liquidity

The previous results show that homesellers captured financing premiums without sacrificing a reasonable selling time during periods of normal housing markets. Thus one might suspect that during periods of high interest rates, when home sales are low, sellers with assumable mortgages may sacrifice some or all of the financing premium to activate sales. To test this, data on home sales for the same market for 1980 were used, since that year was characterized by both high levels and high variability of interest rates.

The results of eqution (6) for conventional and assumption sales are indicated in the top right corner of Table 2. The coefficient of LP/SP is not significant, indicating that the time on the market during that period was not sensitive to price changes, at least within the range of the prices that these houses were listed and sold. However, the coefficient of CMR is significant, indicating that time on the market was affected by the average mortgage contract rate during that period.

Ta

ble

2.

Res

ults

of

the

two-

stag

e le

ast

squ

ares

mo

del

for

In

DM

KT

var

iabl

e an

d a

lo

gar

ith

mic

tra

nsf

orm

ed h

edo

nic

pri

cing

mo

del

1976

19

80

Co

nv

cnti

on

al

Ass

um

pti

on

C

on

ven

tio

nal

A

ssu

mp

tio

n

G~

In C

on

stan

t

LP

/SP

CM

R

In D

MK

T

In D

MK

T

In D

MK

T

In D

MK

T

2.50

1.

01

2.93

1.

87

(1.9

1)**

(1

.87)

**

(2.2

1)*

(2.3

0)*

O. 1

1 O

. 14

2.74

4.

52

(3.2

5)*

(2.8

4)*

(0.1

5)

(0.1

3)

3.03

1.

07

0.46

0.

49

(1.4

7)

(1.5

2)

(5.1

4)*

(4.1

7)*

In L

P

In S

P

In L

P

In S

P

In L

P

In S

P

In L

P

In S

P

In C

on

stan

t 4.

19

4.21

5.

00

5.69

7.

42

7.99

7.

72

7.55

(6

.41)

* (6

.26)

* (5

.89)

* (6

.15)

* (8

.22)

* (8

.18)

* (1

2.90

)*

(11.

72)

In S

QF

T

0.89

0.

88

0.71

0.

60

0.46

0.

35

0.35

0.

38

(8.3

2)*

(.79

9)*

(5.3

4)*

(4.0

9)*

(3.5

3)*

(2.4

9)*

(3.6

5)*

(3.6

6)*

In B

DR

M

-0.4

0

-0.3

4

0.38

0.

48

0.33

-0

.22

0.

05

0.07

(-

2.88

)*

(-2.

34)*

(1

.94)

**

(2.3

0)*

(2.0

0)*

(-1

.22

) (0

.44)

(0

.55)

In

BT

H

0.12

0.

14

0.01

" 0.

07

0.32

0.

33

0.26

0.

23

(1.1

4)

(1.2

7)

0.03

)*

(0.4

9)

(3.2

3)*

(3.0

8)*

(2.6

5)*

(2.1

6)*

In B

MT

0.

08

0.08

--

0.06

--

0:08

0.

06

0.04

0.

07

0.08

(1

.51)

(1

.55)

(-

1.5

3)

(- 1

.70)

**

(1.0

3)

(0.5

8)

(1.5

1)

(1.4

4)

In A

GE

-0

.09

-0

.09

-0

.02

-0

.02

0.

01

0.01

0.

02

0.02

(-

3.81

)*

(-3.

57)*

(-

0.9

2)

(-0

.91

) (0

.77)

(0

.68)

(0

.90)

(0

.80)

In

A C

0.

06

0.05

0.

11

0.13

0.

10

0.10

0.

09

0.09

(1

.15)

(0

.94)

(2

.25)

* (2

.40)

(1

.77)

(1

.72)

**

(2.0

0)*

(1.9

8)

In F

P

-0.0

6

-0.0

7

0.07

0.

06

0.13

0.

15

0.14

0.

16

(-0.

81)

(- 1

.00)

(1

.02)

(0

.82)

(1

.78)

* (1

.89"

*)

(3.0

1)*

(3.1

4)

In G

AR

-0

.02

0.

01

0.03

0.

05

0.07

0.

08

0.06

0.

04

(-0.

39)

(0.1

5)

(0.5

6)

(0.9

2)

(1.3

6)

(1.4

2)

(1.5

2)

(0.9

7)

In D

MK

T

0.06

0.

04

-0.0

6

--0.

07

-0.0

1 0.

01

-0.0

1

--0.

01

(1.5

8)

(0.9

5)

(1.5

5)

(-1.

70)*

* (-

(0.2

0)

(0.1

8)

(-0

.02

) (-

0.3

7)

In P

RE

M

--

--

0.02

0.

01

--

--

0.01

0.

01

(1.9

7)**

(1

.74)

**

--

--

0.35

0.

06

O

ra~

t =

stat

isti

c in

par

enth

esis

, *

dcn

ote

s si

gnif

ican

ce a

t th

e .0

5 le

vel.

t

= st

atis

tic

in p

aren

thes

is,

** d

eno

tes

sign

ific

ance

at

the

.10

leve

l.


Table 1 summary statistics show that the actual average time on the market for a house sold with a new conventional loan was 104 days.

As with conventional sales, when equation (6) is estimated for houses sold with assumption financing in 1980, the coefficient of LP/SP is not significant and the coefficient of CMR is significant. The average number of days on the market for these properties was 66 days, which is much lower than the number of days for properties with new conventional loans.

These results along with the 1980 hedonic pricing model regression results from Table 2 indicate that sellers followed a different strategy for 1980 than for the 1975- 1976 period. First, the results show no significant capitalization of a financing premium in either the listing price or the selling price in 1980. Also, Table 1 shows that homes with assumption financing experienced a shorter average time on the market. The average days on the market for assumption properties was 66 days, compared to 104 days for conventional sales. This implies that sellers traded the financing premium for liquidity in this depressed market. This is substantiated by Table 1, which shows that the percentage of list price captured in selling price for assumptions was the same as for conventionals. Recall that if the same premium is included in LP and SP, the LP/SP for assumptions would be less than LP/SP for conventional sales. If no premium is included in either LP or SP for assumptions, LP/SP should be the same for assumptions and conventionals. If, for assumptions, LP contains a larger premium than SP, then LP/SP for assumptions would be greater than or equal to LP/SP for conventional sales. Combined with the fact that no premium was reflected either in the list or sale price, this implies that sellers with assumption financing conceded the premium from the outset in order to achieve a shorter selling time.

5. Summary and conclusions

This paper has examined the extent to which financing premiums affect the length of time a property stays on the market. The results show that premiums were present in selling prices of assumption-financed home sales in the 1975-1976 period, and that assumption sellers could capture a premium and still sell their properties for the average time on the market relative to other properties. The results of the hedonic model for the 1980 period show that no premium was present either in the listing price or the selling price of the house. This could indicate that sellers may have conceded away the premium at the outset, since the average selling time for assumptions (66 days) was much less than for homes with conventional loans (104 days), and buyers were recognizing this advantage.

In this regard, the results for the 1975-1976 period, combined with Figure 1, suggest that sellers may not have been able to capture the entire premium as indicated by traditional cash equivalence. However, since the assumptions had a "normal" selling time under a normal setting for market interest rates, a financing premium was capitalized. An excessively long period of time on the market could have indicated that the seller was holding out for an excessive premium, whereas a much


shorter selling time than normal could have indicated that sellers were conceding a larger portion of the premium than necessary. Thus, in periods of low sales volume, such as 1980, home sellers of houses with assumption loans may concede away a portion of the financing premium in order to decrease the number of days their properties remain on the market for sale.

Notes

1. It should be noted that Figure 1 assumes relatively low and stable interest rates. Under such a scenario, the current mortgage contract rate would not be a major factor affecting the time period a house takes to sell. In this case, the home sellers' main concern is determining the best price at which to list the property.

2. This analysis makes two assumptions: (1) the market is efficient in setting prices such that the observed selling price equals the true intrinsic value of the property, and (2) the seller is only willing to sell the property at a price close to or equal to the listing price. It seems that a seller who lists a property at a price much greater than the market value is either misinformed about the market or is seeking to capture a price greater than market value. In either case, it may be possible to price oneself out of the market.

3. Other things being equal, a property sold with assumption financing should remain on the market for the same time as an identical property with a new conventional mortgage. According to Figure 1, for this condition to be accepted L P a / S P a should be equal to LPf fSPo or (LPa - SPa)/SPa = (LPc - SPc)/SPo

or still (LP a - SPa) / (LP c - SPc) = S P a / S P c. Call this latter expression equation (3A). Since, according to equation (3) given in the text, SPa is greater than SPo for equation (3A) to hold, (LPa - SPa) must be greater than (LP c - SPc). Therefore, a greater premium should be incorporated into L P a than into the selling price (SPa). To this, note that combining equation (3) with the expression L P a = L P c + P R E M I ~ where P R E M L e is the premium incorporated into LPa, yields L P a - S P a = L P c - S P c + ( P R E M L p - P R E M ) and, therefore, ( L P a - S P a ) / ( L P c - S P c ) = ( L P c - S P c + P R E M ) / ( L P c - S P c ) . Note that if P R E M = O, or, P R E M L p = P R E M , this latter expression is equal to 1, i.e., ( L P a - S P a ) / ( L P c - S P r = 1. However, according to equation (3), S P a is greater than SPr and, as a result, ( L P a - S P a ) / ( L P c - S P c ) must be greater than one.

4. This is consistent with Miller and Sklarz (1988), who claim that time on the market is affected by the relationship between list price and the true market value of the property. They compare list price and selling price to a predicted market value and find that when asking price is less than predicted price, a smaller decline from list price to selling price should occur than when asking price exceeds predicted price. Their results indicate a longer average time on the market when asking price exceeded pi~e- dicted price than when asking price was less than predicted price.

5. The number of days a house stays on the market ( D M K T ) can be affected by both the list and selling prices and the level of mortgage rates. In this case, D M K T is an endogeneous variable. But it has also been shown that the longer a property remains on the market the higher the probability that a relatively superior selling price can be captured (see Miller, (1978)). In such a case D M K T is a ex- ogeneous variable. Thus a simultaneous equations approach should be appropriate to capture the relationship between selling price and time on the market.

6. Alternatively, these results show a positive relationship between the difference in list price and selling price (i.e., the concession of the seller on selling price) and the length of time on the market. This is expectable, since sellers are likely to prefer to err on the high side of any transaction so as not to preclude realizing the highest possible bid. As a result sellers may systematically establish higher initial asking prices. In a competitive market this should result in a longer time on the market. Zerbst and Brueggeman (1977) find a simular result for FHA/Va financing.

Also, we assume that realistic listing prices are set by sellers with the aid of real estate agents. This is shown in Belkin, Hemphel, and McLeary (1976). It should be noted that the model used here does not account for dynamic characteristics, since the only prices available are the initial list price and the final


selling price. For example, there is no way to measure seller reaction after 30, 60, 90 days, etc. Also, there is no way to determine if some sellers experienced re-listing of their properties at lower listing prices.

7. Theoretically, one would like to test the relationship between DMKT and the financing premium. Since the actual premium is not known, however, this is not possible. Due to significant correlation between PREM and other independent variables, no reliable estimate of the degree of capitalization of the cash equivalence adjustment could be obtained. Thus there is no way to measure the actual average premium. Also, there is no way to determine whether some of the premium was negotiated away. In any case, there still remains a significant premium in the selling price.

References

Allen, P.R.; Shilling, J.D.; and Sirmans, C.F. "Contracting, Contingencies and Single-Family House Prices." Economic Inquiry 25 (January 1987), 159-164.

Belkin, J.; Hemphel, DJ.; and McLeavey, D. W. "An Empirical Study of Time on Market Using Mul- tidimensional Segmentation of Housing Markets." AREUEA Journal 4 (Fall 1976), 57-75.

Bible, D.S. and Crunkleton, J.R. "The Effects of Financing on the Sale of Multi-Family Properties." The Real Estate Appraiser and Analyst 49 (Summer 1983), 33-37.

Clauretie, Terrence M. "Capitalization of Seller-Supplied Financing: Implications for Assessment." Property Tax Journal (December 1984).

Corgel, John B. and Goebel Paul R. "Financing Adjustments via Cash Equivalency: Evidence on Accuracy." The Real Estate Appraiser andAnalyst 49 (Spring 1983), 55-61.

Cubbins, J.S. "Price, Quality and Selling Time in the Housing Market.'AppliedEconomies 6 (1974), 171- 187.

Ferreira, E.J. and Sirmans, G.S. "Assumable Loan Value in Creative Financing." Housing Finance Review 3 (April 1984), 139-148,

Ferreira, E.J. and Sirmans, G.S. "The Capitalization of Creative Financing in House Prices in Perfect Capital Markets." The Appraisal Journal 53 (July 1985), 371-378.

Ferreira, E.J. and Sirmans, G.S. "Interest Rate Volatility and Assumable Loan Value in Creative Financing." The Real Estate Appraiser andAnalyst 52 (Spring 1986), 60-67.

Gaines, J.P.; Ingrain, F.J. and Gregory, C.W. "Conventional Financing Effects on Residential Market Prices During Periods of Increasing Interest Rates." Presented at the annual meeting of the American Real Estate and Urban Economics Association, December 1983.

Hubert, James. and Mann, Bruce D. "The Effect of Creative Financing on the Value of SingJe-Family Homes." The Real Estate Appraiser andAnalyst 50 (Summer 1984), 5-10.

Miller, Norm. "Residential Property Hedonic Pricing Models: A Review." Research in Real Estate 2 (1982), 31-56.

Miller, N.G. "Time on the Market and Selling Price." AREUEA Journal 6 (Summer 1978), 164-174. Miller, N.G. and Sldarz, M.A. "Pricing Strategies and Residential Property Selling Prices." Un-

published paper. 1988. Rosen, Kenneth T. "Creative Financing and House Prices: A Study of Capitalization Effects." Housing

Financing Review 3 (April 1984), 119-128. Sirmans, G. Stacy; Sirmans, C.F.; and Smith, Stanley D. "Assumption Financing, Cash Equivalency,

and Comparable Sales Analysis." The Real Estate Appraiser andAnalyst 50 (Fall 1984), 55-60. Sirmans, G.S.; Sirmans, C.F.; and Smith, S.D. "Attractive Loan Packaging Equals Better Profits."

Mortgage Banking 46 (February 1986), 61-69. Sirmans, G. Stacy; Cirmans, C.F.; and Smith, Stanley D. "The Effect of Assumptions Financing on

Residential Property Values." Federal Home Loan Bank Board Journal 16 (August 1983), 22-25. Sirmans, G.S.; Sirmans, C.F.; and Smith, S.D. "The Issues and Implications of Creative Financing and

House Prices: A Survey." Property Tax Journal 4 (December 1985): 383-415.


Sirmans, G. Stacy; Smith, Stanley D.; and Sirmans, C.F. "Assumption Financing and Selling Price of Single-Family Homes." Journal of Financial and Quantitative Analysis 18 (September 1983), 307- 317.

Smith, Stanley D.; Sirmans, G. Stacey; and Sirmans, C.F. "The Valuation of Creative Financing in Housing." Housing Finance Review 3 (April 1984), 129-138.

Trippi, R.R. "Estimating the Relationship Between Price and Time of Sale for Investment Property." Management Science 23 (April 1977), 838-842.

Zerbst, R.H. and Brueggeman, W.B. "FHA and VA Mortgage Discount Points and Housing Prices." Journal of Finance 32 (December 1977), 1766-1773.

Documents

Selling price, financing premiums, and days on the market