Home Purchase Economics
For prospective homeowners, the decision to purchase a home will be one of the biggest decisions to make in his or her lifetime. Purchasing a home can have severe financial repercussions, so the decision must be weighed carefully. In order to make a sound decision, a prospective homeowner must have full knowledge of the steps involved in making the large purchase and the potential future outcomes. The economy is the key reason to making a final decision with a home purchase. Homeowners should realize that a number of the 10 principles of economics will apply to the decision-making process.
For instance, tenants are currently renting a studio apartment and just discovered they are having a baby. The present apartment is small and far away …show more content…
from schools and local services causing an inconvenience. The decision of the tenants is to purchase a new home. The tenants realize the decision to purchase a home requires a substantial financial outlay and making the wrong decision may have long-term financial consequences. The first principle that directly relates to the home purchasing decision will be people facing trade-offs. The first principle, people face trade-offs is based on giving up something that is wanted, to get something else that is wanted. [CITATION PG. 4] The tenants are facing trade-off because of the decision to limit the purchase of unnecessary items in order to save money for the purchase of a home to provide room and stability for the new baby. Studio apartments are easier to maintenance and a renter has no worries about fixing any issues that arise such as plumbing, broken windows, or leaks. When a person purchases a home, there are many factors they need to consider as far as interior and exterior care of the home.
Additionally, the second principle, the cost of something is what you give up to get it plays a role in the tenant’s decision to purchase a home. Renting a studio apartment is less expensive than making a large and weighty home purchase. Even though the cost of living in the studio apartment would be less expensive than purchasing a home, the marginal benefit is still much greater than the opportunity cost. The opportunity cost of the studio apartment is what will be given up when making the new home purchase. Another cost may be the tenant’s familiarity with the area in which they reside. The tenant’s may even be moving away from close family and friends. The cost of something is what you give up to get it does not only apply to money and material items.
The third principle, rational people think at a margin applies to the tenant’s new home purchase as well.
Rational people often make decisions by comparing marginal benefits and marginal costs.[direct quote pg 6] Marginal costs and benefits are used by consumers to determine if they will make a decision. The tenant’s will make the purchase if the marginal benefit is above the marginal cost. It is more valuable to purchase a home during periods of economic growth rather during a recession. If a consumer purchases a home during a recession, the marginal costs outweigh the benefits. If a consumer purchases a home during economic growth, the marginal benefits outweigh the costs. In the tenant’s scenario, the marginal benefit is greater than the marginal costs of purchasing a home. Purchasing a home within closer proximity of schools and local services will benefit the new family especially with saving money on gas prices by driving shorter distances. The money the family would spend on gas can be used for items needed in the new home. A new home will also provide the additional space needed to raise a family which provides a greater marginal …show more content…
benefit.
Explain how the strength of the economy as a whole affected the marginal benefits and the marginal costs associated with that decision.
The strength of the economy determines the market price and is the most important factor in determining interest rates. The interest rates will determine how much will be paid for the purchase of the home. Additionally, interest rates will determine if a perspective home owner is able to afford the payments on the home.
The removal of tax deduction on mortgage interest affects the housing market by resulting in a decrease of demand to purchase homes. The reason is because consumers determine that marginal costs outweigh the marginal benefits of purchasing a home.
Other changes in government spending and taxes can affect the decision to purchase a new home in a negative or positive manner. If the government increases taxes, there is less income for consumers to spend on making a new home purchase. If the government is able to promote economic growth, consumers would be more willing to purchase a new home.
Rational thinking people respond to incentives because they make decisions based on comparison of costs and benefits. Pg7,para3
Rational people think at a margin leads to principle four, people respond to incentives.
Principle 5: Trade Can Make Everyone Better Off
Principle 6: Markets Are Usually a Good Way to Organize Economic Activity
Principle 7: Governments Can Sometimes Improve Market Outcomes
Principle 8: A Country’s Standard of Living Depends on Its Ability to Produce Goods and Services
Principle 9: Prices Rise When the Government Prints Too Much Money
Principle 10: Society Faces a Short-Run Trade-off between Inflation and Unemployment
Consider the roles of the domestic economy and international trade in your assessment of the strength of the economy.
A New House—Risks and Benefits. This CheckPoint has you consider the risks and benefits of purchasing a new home in relation to national fiscal policies.
The government body influencing national fiscal policies that potentially affect the housing market is the Federal Reserve (Feds). The Feds control the quantity of money that is made available. The Feds determine decrease and increase of the money supply. Any changes in the money supply can have an effect on the economy because prices rise when the government prints too much money. Additionally, the Feds are the last resort lender for banks when banks need to borrow money. Banks play a role in the control of the money supply because demand deposits are held in banks influencing the quantity of demand deposits in the economy.
Some national fiscal policies that can affect mortgages rates, housing starts, and housing prices are interest rates and prime lending. Interest rates are determined by the Feds. A lower Fed loan will mean a lower mortgage rate. Prime lending rates may be the leading factor that affects the aforementioned. The lending rate establishes if lenders are able to borrow money from the Feds for mortgages and housing starts. The housing prices will fall if rates are too high.
Recommendations as to the risks and benefits of purchasing a home based on the aforementioned considerations are for prospective home buyers to take their time purchasing a home. Prospective home buyers should carefully weigh the condition the economy is in and save enough money to make a decent down payment. If the housing prices are too high, interest rates will eventually fall. However, stronger inflation will cause long term interest rates to increase. Interest rates are currently at 4.95% and they are forecasted to increase to 5.6% by the end of the year.
Determine what situations or conditions could have led you to make a different decision.
A situation that may have led to a different decision to purchase a home would be purchasing a home that is for investment potential rather than a home to live in.
Unfortunately, homeowners purchase the home at a cheaper listing price and end up spending tons of money to fix it up. In the grand scheme of things, this action can cause a homeowner to spend more money and time than necessary. Some homes are purchased with the notation that they can be modeled to fit the homeowner’s needs and wants to make a profit in the future. Homeowners may not consider the condition the economy may be in when the time arises to purchase another home. If the housing marketing decreases, the value of the property will decrease as well. The homeowner will have then made a decision that was not beneficial in the long run. Additionally, prospective homeowners do not realize the importance and value of an agent or loan officer. Agents or loan officers should educate a client because they are the advocates for homeowners. Learning about the area, location, and most importantly the way a loan works is essential. Lastly, the decision to make any changes to the property is based on rule and regulations from the city or county where the home was purchased. Figuring out the rules and regulations if the plan to remodel or expand the home is essential as
well. spend at least 70 - 80% of my income just on rent and utilities every years, and I can't do it anymore - I just can't. So, I'm investing every single dollar I have to buy an apartment and finally get out of the rent race. I'm nervous about it, because I am not going to have any money in savings left -- at all -- in the biggest recession I've ever seen in my lifetime, and with an income that isn't stable (I'm self-employed) in a tenuous economy, I'm scared that I might be making the wrong decision. But all I've dreamed about for the last five years is being able to finally buy an apartment and finally be able to go to sleep every night not worrying that I'm going to wake up the next day and find out that I have to move *yet again* based on landlords raising rent overnight again.
For instance, tenants are currently renting a studio apartment and just discovered they are having a baby. The present apartment is small and far away …show more content…
from schools and local services causing an inconvenience. The decision of the tenants is to purchase a new home. The tenants realize the decision to purchase a home requires a substantial financial outlay and making the wrong decision may have long-term financial consequences. The first principle that directly relates to the home purchasing decision will be people facing trade-offs. The first principle, people face trade-offs is based on giving up something that is wanted, to get something else that is wanted. [CITATION PG. 4] The tenants are facing trade-off because of the decision to limit the purchase of unnecessary items in order to save money for the purchase of a home to provide room and stability for the new baby. Studio apartments are easier to maintenance and a renter has no worries about fixing any issues that arise such as plumbing, broken windows, or leaks. When a person purchases a home, there are many factors they need to consider as far as interior and exterior care of the home.
Additionally, the second principle, the cost of something is what you give up to get it plays a role in the tenant’s decision to purchase a home. Renting a studio apartment is less expensive than making a large and weighty home purchase. Even though the cost of living in the studio apartment would be less expensive than purchasing a home, the marginal benefit is still much greater than the opportunity cost. The opportunity cost of the studio apartment is what will be given up when making the new home purchase. Another cost may be the tenant’s familiarity with the area in which they reside. The tenant’s may even be moving away from close family and friends. The cost of something is what you give up to get it does not only apply to money and material items.
The third principle, rational people think at a margin applies to the tenant’s new home purchase as well.
Rational people often make decisions by comparing marginal benefits and marginal costs.[direct quote pg 6] Marginal costs and benefits are used by consumers to determine if they will make a decision. The tenant’s will make the purchase if the marginal benefit is above the marginal cost. It is more valuable to purchase a home during periods of economic growth rather during a recession. If a consumer purchases a home during a recession, the marginal costs outweigh the benefits. If a consumer purchases a home during economic growth, the marginal benefits outweigh the costs. In the tenant’s scenario, the marginal benefit is greater than the marginal costs of purchasing a home. Purchasing a home within closer proximity of schools and local services will benefit the new family especially with saving money on gas prices by driving shorter distances. The money the family would spend on gas can be used for items needed in the new home. A new home will also provide the additional space needed to raise a family which provides a greater marginal …show more content…
benefit.
Explain how the strength of the economy as a whole affected the marginal benefits and the marginal costs associated with that decision.
The strength of the economy determines the market price and is the most important factor in determining interest rates. The interest rates will determine how much will be paid for the purchase of the home. Additionally, interest rates will determine if a perspective home owner is able to afford the payments on the home.
The removal of tax deduction on mortgage interest affects the housing market by resulting in a decrease of demand to purchase homes. The reason is because consumers determine that marginal costs outweigh the marginal benefits of purchasing a home.
Other changes in government spending and taxes can affect the decision to purchase a new home in a negative or positive manner. If the government increases taxes, there is less income for consumers to spend on making a new home purchase. If the government is able to promote economic growth, consumers would be more willing to purchase a new home.
Rational thinking people respond to incentives because they make decisions based on comparison of costs and benefits. Pg7,para3
Rational people think at a margin leads to principle four, people respond to incentives.
Principle 5: Trade Can Make Everyone Better Off
Principle 6: Markets Are Usually a Good Way to Organize Economic Activity
Principle 7: Governments Can Sometimes Improve Market Outcomes
Principle 8: A Country’s Standard of Living Depends on Its Ability to Produce Goods and Services
Principle 9: Prices Rise When the Government Prints Too Much Money
Principle 10: Society Faces a Short-Run Trade-off between Inflation and Unemployment
Consider the roles of the domestic economy and international trade in your assessment of the strength of the economy.
A New House—Risks and Benefits. This CheckPoint has you consider the risks and benefits of purchasing a new home in relation to national fiscal policies.
The government body influencing national fiscal policies that potentially affect the housing market is the Federal Reserve (Feds). The Feds control the quantity of money that is made available. The Feds determine decrease and increase of the money supply. Any changes in the money supply can have an effect on the economy because prices rise when the government prints too much money. Additionally, the Feds are the last resort lender for banks when banks need to borrow money. Banks play a role in the control of the money supply because demand deposits are held in banks influencing the quantity of demand deposits in the economy.
Some national fiscal policies that can affect mortgages rates, housing starts, and housing prices are interest rates and prime lending. Interest rates are determined by the Feds. A lower Fed loan will mean a lower mortgage rate. Prime lending rates may be the leading factor that affects the aforementioned. The lending rate establishes if lenders are able to borrow money from the Feds for mortgages and housing starts. The housing prices will fall if rates are too high.
Recommendations as to the risks and benefits of purchasing a home based on the aforementioned considerations are for prospective home buyers to take their time purchasing a home. Prospective home buyers should carefully weigh the condition the economy is in and save enough money to make a decent down payment. If the housing prices are too high, interest rates will eventually fall. However, stronger inflation will cause long term interest rates to increase. Interest rates are currently at 4.95% and they are forecasted to increase to 5.6% by the end of the year.
Determine what situations or conditions could have led you to make a different decision.
A situation that may have led to a different decision to purchase a home would be purchasing a home that is for investment potential rather than a home to live in.
Unfortunately, homeowners purchase the home at a cheaper listing price and end up spending tons of money to fix it up. In the grand scheme of things, this action can cause a homeowner to spend more money and time than necessary. Some homes are purchased with the notation that they can be modeled to fit the homeowner’s needs and wants to make a profit in the future. Homeowners may not consider the condition the economy may be in when the time arises to purchase another home. If the housing marketing decreases, the value of the property will decrease as well. The homeowner will have then made a decision that was not beneficial in the long run. Additionally, prospective homeowners do not realize the importance and value of an agent or loan officer. Agents or loan officers should educate a client because they are the advocates for homeowners. Learning about the area, location, and most importantly the way a loan works is essential. Lastly, the decision to make any changes to the property is based on rule and regulations from the city or county where the home was purchased. Figuring out the rules and regulations if the plan to remodel or expand the home is essential as
well. spend at least 70 - 80% of my income just on rent and utilities every years, and I can't do it anymore - I just can't. So, I'm investing every single dollar I have to buy an apartment and finally get out of the rent race. I'm nervous about it, because I am not going to have any money in savings left -- at all -- in the biggest recession I've ever seen in my lifetime, and with an income that isn't stable (I'm self-employed) in a tenuous economy, I'm scared that I might be making the wrong decision. But all I've dreamed about for the last five years is being able to finally buy an apartment and finally be able to go to sleep every night not worrying that I'm going to wake up the next day and find out that I have to move *yet again* based on landlords raising rent overnight again.