The Effect of Mortgage Rate Buydowns on Housing Prices:

The model developed in this paper analyzes the effect of builder-financed FHA-VA mortgage subsidies or buydowns on the price of housing. Hedonic pricing equations are estimated for a locationally and qualitatively uniform sample of new tract development homes. The explanatory variables are vectors of physical and financial characteristics. The latter include a continuous variable for discount points paid by builders which is indicative of the magnitude of prepaid finance charges. The results indicate that a substantial portion of mortgage subsidy costs are shifted to buyers in the form of inflated housing prices.