Appreciation vs. Equity

The main objective is to demonstrate that house appreciation is independent of mortgage debt.  That is, the market value of the house will increase (or decrease) the same whether the client owns the house free and clear or has a large outstanding mortgage.

Assumptions, Limitations, & Clarifications

The equity in the house is assumed to be today's (or the current) equity.  It is not adjusted over time.  This is a good assumption for the first few years of a mortgage, when almost the entire mortgage payment goes to interest.  It is NOT a good assumption in the latter years of a mortgage when the mortgage principal is being paid down rapidly.

No script is provided for this screen.

Be aware that the buying power calculation is an inverse relationship.  That is, as the price of goods increase, we are calculating how many goods a fixed dollar amount will purchase, like $1,000/ (cost of goods).  By contrast, the market value increase is a direct relationship.  That is, the market value of the house increases or decreases by some percentage each year.  It is in the form of $ X plus $ Y (notice no division).  In the first case we are dividing (an inverses relationship) and in the second case we are simply adding an amount.  This explains why for an appreciation rate of 10%, the house value increases 10% per year.  But, in contrast, for an inflation rate of 10%, the buying power of a dollar changes in one year to 90.0909 cents (of today's dollars), not to 90.0000 cents.  Notice that 1 divided by 1.1 is 90.0909.

Appreciation can be shown either in nominal dollars or inflation adjusted dollars.  Nominal dollars are NOT adjusted for inflation.  Today's dollars are adjusted for inflation.

Equity is simply the market value the house minus the debt (outstanding mortgages).

The future buying power of the current equity can be calculated with the formula:

Future Buying Power = (Current Equity) / ( 1 + Inflation Rate)^ Elapsed Years

The future market value of the house can be calculated with the formula:

Future Market Value = (Current Market Value)* ( 1 + House Appreciation Rate)^ Elapsed Years

Year-by-year presentation of the specific results are provided in the documentation worksheets.