Current Version: 1.2.4 (2006.04.25). Release notes.
Download this version to be sure you have no errors.
Next Version Expected: *none planned*
Password to unlock the spreadsheet: cap20
9/25/2007: A number of folks have written to inform me that the spreadsheet does not operate properly in newer versions of Excel. Rather than update the model right now I'm just making the password available to everyone (above). I may get around to refactoring the model to operate properly sometime, but probably not very soon.
I offer the Bubblizer, an Excel spreadsheet model intended to help everyday folks rationally approach a home buying decision in today's uncertain bubble environment. I am requesting comments, criticisms and improvements for this model. Once this spreadsheet version of the Bubblizer is stable, I intend to create a web version (which does not require Excel, but is based upon the same model).
Please share the link to this article with your more financially and quantitatively minded colleagues and friends.
The Basis for this Model:
This model was inspired by the approach taken in the HSBC publication, A Froth-Finding Mission, Detecting US Housing Bubbles, and accompanying spreadsheet model. HSBC forwarded a reasonable, consistent macroeconomic model for determining the existence and degree of US housing bubbles. What I have done is distill their approach to analyze a specific, individual home buying decision.
This model attempts to take into account all relevant opportunity costs as well as expected inflation. It then computes the price at which the home buyer would need to sell her home after her expected holding period (how long she'll live there) in order to break even in real terms. The implied nominal return based on price appreciation and the implied annual return based upon the IRR are also computed. Finally, some extra information is provided in order to help the concerned potential buyer figure out if she can afford the prospective home.
The Need for this Model:
This model is needed as a counterweight to the increasingly aggressive and often desperate advertising and advice being given to everyday home buyers by real-estate agents, mortgage brokers and various real-estate industry groups. Worse, the popular media has failed to provide any critical analysis of the real costs faced by current potential home buyers in high-priced bubble markets.
This model attempts to take some basic inputs and give prospective home buyers a few simple numbers as outputs. The home buyer should be able to look at these numbers and quickly be able to determine if she believes them reasonable. This model makes no explicit value judgments. Rather, it simply shows the user what price she will have to sell her home for in the future to justify the purchase on strictly financial terms.
The model also provides a number of optional inputs, allowing more sophisticated or exceptional users to express specific beliefs about the future (for example, future inflation) which differ from the HSBC findings. Further, the user can capture the value of "intangibles" as a premium she would be willing to pay in excess of the strictly financial solution. She can also plan for real appreciation (in excess of real break even), perhaps to plan for a home equity withdrawal or post-occupancy use of equity profits for consumption purposes (for example, college tuition for a child, retirement, etc.).
The inputs in the spreadsheet are fully annotated, and are intended to provide a clear explanation to the home buyer about how they work in the model.
The Current Limitations of this Model:
- Only fixed-rate, standard, US-style, mortgages are handled.
- The mortgage period must be between 10 and 30 years, inclusively.
- Holding periods beyond 30 years are not handled (because at this point the home would be fully owned, and this would require a two-step model).
- The buyer's income is assumed to increase at the inflation rate. The model does not directly accommodate expected future income growth in excess of inflation.
- Rent is assumed to increase at the inflation rate. Micro economic rent factors are not captured.
The Next Phase:
After this spreadsheet version of this model has stabilized and all acceptable comments incorporated, the next step will be to implement it as a web application. The purpose of this will be to reach a wide audience with what should be a very useful tool. Prospective home buyers can use this tool to educate themselves. It should provide them some defense against falling prey to hyper-aggressive sales tactics being deployed against them in this uncertain, "frothy" housing market.
Paul Ashby (firstname.lastname@example.org)