Table of Contents


File

calc_value_house.m

Name

calc_value_house

Synopsis

calc_value_house - Calculates the value of a house at time t with t beginning at begin_time.

Introduction

NOTE: PART OF A SET OF 8 RELATED FILES:

Khandani, Lo, and Merton (2009) posit that rising home prices, declining interest rates, and near-frictionless refinancing opportunities led to vastly increased systemic risk in the financial system. A simultaneous occurrence of these factors imposes an unintentional synchronization of homeowner leverage. This synchronization, coupled with the indivisibility of residential real estate that prevents homeowners from deleveraging when property values decline and homeowner equity deteriorates, conspire to create a ratchet effect in which homeowner leverage is maintained or increased during good times without the ability to decrease leverage during bad times. To measure the systemic impact of this ratchet effect, the U.S. housing market is simulated with and without equity extractions, and the losses absorbed by mortgage lenders is estimated by valuing the embedded put option in non-recourse mortgages. The proposed systemic risk indicator for the housing market is the dollar-delta of this embedded put option.

License

=============================================================================

Copyright 2011, Dimitrios Bisias, Andrew W. Lo, and Stavros Valavanis

COPYRIGHT STATUS: This work was funded in whole or in part by the Office of Financial Research under U.S. Government contract TOSOFR-11-C-0001, and is, therefore, subject to the following license: The Government is granted for itself and others acting on its behalf a paid-up, nonexclusive, irrevocable, worldwide license to reproduce, prepare derivative works, distribute copies to the public, perform and display the work.
All other rights are reserved by the copyright owner.

THIS SOFTWARE IS PROVIDED "AS IS". YOU ARE USING THIS SOFTWARE AT YOUR OWN RISK. ANY EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, THE IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE ARE DISCLAIMED. IN NO EVENT SHALL THE AUTHORS, CONTRIBUTORS, OR THE UNITED STATES GOVERNMENT BE LIABLE FOR ANY DIRECT, INDIRECT, INCIDENTAL, SPECIAL, EXEMPLARY, OR CONSEQUENTIAL DAMAGES (INCLUDING, BUT NOT LIMITED TO, PROCUREMENT OF SUBSTITUTE GOODS OR SERVICES; LOSS OF USE, DATA, OR PROFITS; OR BUSINESS INTERRUPTION) HOWEVER CAUSED AND ON ANY THEORY OF LIABILITY, WHETHER IN CONTRACT, STRICT LIABILITY, OR TORT (INCLUDING NEGLIGENCE OR OTHERWISE) ARISING IN ANY WAY OUT OF THE USE OF THIS SOFTWARE, EVEN IF ADVISED OF THE POSSIBILITY OF SUCH DAMAGE.

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Inputs

begin_time
Name:
begin_time
Description:

The vintage of the house. 1 <= begin_time <= t <= length(hpi)

Type:
integer
Range:
{1,...,+inf}
Dimensions:

scalar


t
Name:
t
Description:

The time at which we want to calculate the value of the house. This must be > 1 as it used as an index. 1 <= begin_time <= t <=length(hpi)

Type:
integer
Range:
{1,...,+inf}
Dimensions:

scalar


hpi
Name:
hpi
Description:

The Home Price Index monthly timeseries indicates increases in the value of existing homes.

Type:
float
Range:
(0,+inf)
Dimensions:

Tx1 matrix

  1. Rows represent Months (ascending).

nhp
Name:
nhp
Description:

Monthly timeseries showing new house prices that is used for determining home value at time of first sale.

Type:
float
Range:
(0,+inf)
Dimensions:

Tx1 matrix

  1. Rows represent Months (ascending).

Outputs

v
Name:
v
Description:

House value at time t after adjusting for changes in HPI.

Type:
float
Range:
(0,+inf)
Dimensions:

scalar


Code

% Run warning message
warning('OFRwp0001:UntestedCode', ...
    ['This version of the source code is very preliminary, ' ...
     'and has not been thoroughly tested. Users should not rely on ' ...
     'these calculations.']);





v = nhp(begin_time)*hpi(t)/hpi(begin_time);

Examples

NOTE: Numbers used in the examples are arbitrary valid values.
They do not necessarily represent a realistic or plausible scenario.

 begin_time = 1;
 t=5;
 hpi = [1; 1.015; 1.025; 1.035; 1.032; 1.05; 1.09];
 nhp = [1; 1.02; 1.03; 1.04; 1.05; 1.07; 1.11];

 v = calc_value_house(begin_time, t, hpi, nhp);

References

Khandani, A. E., Lo, A. W., & Merton, R. C. (2012). Systemic risk and the refinancing ratchet effect. Journal of Financial Economics.

Bisias et al. (2012). A survey of systemic risk analytics (Working paper #0001). Washington, DC: Office of Financial Research, 89-94.