Running head: NEW HOUSE DECISION
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New House Decision
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New House Decision
A significant amount of time for consideration and evaluations is a must when making a
major purchase such as buying a new home. It is vital to properly review all economic and
financial standings regardless of whether they are national or individual when thinking about
purchasing a new home. The economy plays a major role in deciding whether or not to purchase
a new home. A key role is played by the economy when it comes to purchasing a new home. The
key principles of economics prove to be rather helpful to a new home buyer when
acknowledging and comprehending the many aspects of the new purchase. Nicolas Gregory
Mankiw, a Ukrainian-American macroeconomist who proved to be a rather influential source of
American finances, originated the ten principles of economics. His principles are based on
decision making as the essence of economy. By following the measure, these principles can
increase the profitability while managing individual needs. When making a large financial
decision, the basic principles of economics along with my relative needs must closely assess.
Comparing marginal costs with marginal benefits while weighing out the disadvantages and
advantages of the purchase is included in this process.
While the search for a new home continues, a couple of key principles will be
used by me when considering my purchase. "Tradeoffs" is the first principle; in economics, a
tradeoff means the willingness of one to give up a particular thing for another one. For example,
I will need to sacrifice a hefty number of monetary means when purchasing a new home. An
associated entity of the first principle can also be considered, The Cost of Something is What
You Give Up to Get It. In order to purchase a beautiful home, I will have to sacrifice opportunity
cost; for instance, I will have to cut-down on individual costs such as entertainment, clothing and
food. Marginal thinking, which helps comprehend how to thinking rationally is vital to helping
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make a better financial purchases and decision, is the third principle of economics that I would
select. Owning a home, financial security, tax break and other incentives such as these are also
essential in appreciating the purchase of a new home. This is also known as the fourth principle.
Markets, the sixth principle, can also be an influential aspect when considering purchasing a new
home. Throughout the year, markets vary dramatically due to national economic growth or
distress. A major role is played by the government when it comes to buying a new home. For
example, a $8,000 tax credit has been implemented by the current President of the United States.
According to the National Association of Home Builders (2009), "The Worker, Homeownership
and Business Assistance Act of 2009 have extended the tax credit of up to $8,000 for qualified
first-time home buyers purchasing a principle residence." The federal government increases the
demand for housing by placing more money in the consumers' hands by increasing government
spending while decreasing taxes. This expansionary fiscal policy is designed for a recessional
period. The consumer's demand for housing will increase if the consumer has more money to
spend; if the demand for housing increases, then there will be a significant increase in the supply
as that demand is fulfilled. Additionally, because of the economic default we are currently in,
interest rates are down. This is known as a buyers' market. The purchase of a new home may also
be influenced by the Philips Curve. Holding a job in this economical era is especially difficult.
Inflation is unstable while unemployment is high.
I am aware of the principles that prove to be essential when make a concrete
decision; therefore, I make sure that I am within a realistic budget and execute the search for the
new property. I have calculated, after reviewing all of my individual finances, that my family and
I are able to afford a home that is approximate $300,000 or below. After evaluating the MLS
with my realtor, I have come to notice that the location I desire is within my budget since most of
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the homes around that area are in and around $280,000-$350,000. Nevertheless, I will search for
a home that meets my structural requirements, is within my budget and will help me put away
money for in the future. I can choose to live with comfort rather than on a month-to-month basis
if I select a home that is not at the higher-end of my budget. If I chose a home that went over my
budget, I would not have a demand for it; therefore, I would end up losing the money as well as
the home. The home that interests me costs $275,000 and I am thinking about making an offer.
However, I don't have that amount available in cash. My only other option would be taking out a
loan with a Federal Bank in order to purchase my dream home. As I've mentioned earlier, due to
the economic slump that we are in as a nation, interest rates are low. According to Richard
Gaverman, an author for BussineesWeek.com, low interest rates prove to be not only fiscally
beneficial but also prove to be "particularly beneficial to certain gift- and estate-tax planning
strategies, and thus create opportunities for transferring assets to the next generation without, or
with fewer, gift- and state-tax consequences."
When purchasing the new home, the trade-off will be monetary; I am currently
only paying $1,100 a month for the rental home I reside in. However, financing my own home
will cost me approximately $1,600. Excluding the utilities HOA (if applicable), homeowners
insurance and maintenance, that's $500 more. The location, services located around the house
and schools will also have to be taken into consideration because it is vital for my future kids to
go to a nice local school, in addition to the practicality of a post office or supermarket located
near to where I will reside. Fortunately, a good school is located near the home and is a mere 3
miles from the local grocery store, which will be beneficial to me in the sense that it will help me
save on time as well as gas. Decreasing family spending habits, working overtime, reducing the
costs for entertainment and buying food in bulk will have to be the opportunity cost. After
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calculating me and my partner's income, we have come to the decision that we are able to afford
the home comfortably and have concluded that the marginal benefits of buying a house are worth
the financial strain.
When buying the new home, marginal costs and thinking are also placed into
effect, the distance between the price of the rent paid over a long period of time for the apartment
and the onetime cost of the new home. While the house is simply a one-time cost, the rent paid
for the apartment is a recurring charge. The marginal benefits may be gained through the amount
of money and time saved in terms of traveling to local services and schools. If the marginal
benefits exceed the marginal costs, then it would be of advantage for me to purchase the house
instead of renting the apartment any further.
As of present, I work in the construction industry. My general contracting
company is, from my potential home, only a few miles away. My partner works for MetLife. His
job consists of selling various types of insurance and, in order to do that successfully, he needs
new clientele. Ultimately, the new location of the potential home will assist him in meeting new
people and, since he works in a commission based business, it would be a smart choice to have a
good idea of what condition the economy is in; therefore, we must analyze the potential earnings
as well as the current conditions of the mortgage.
The economy's strength, as a whole, can play a key role on marginal costs related
to the decision of purchasing a new home. The economy is made up of different factors such as
trading, exporting and importing, unemployment, house market and inflation. Marginal benefits,
like the examples listed above, are going to stay the same regardless of what the price of the
home, therefore, here is where one must decide if the marginal cost is worth the actual marginal
benefits. We are currently in an economic recession in which the buyer has the financial
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pendulum since its' the buyer's market. The New York Times reports (2009) a weakening
housing market in a fragile economy is a recipe for pain. According to Moody'sEconomy.com,
about a third of homeowners with a mortgage, which is 15.7 million people, owe more on their
mortgage payments than their homes actual value. When combined with high unemployment,
negative equity increases the risk of foreclosures and delinquencies. In a recession, marginal
costs are significantly lower because business and people are forced to decrease prices and sell
additional inventory that aren't selling. The housing market has been challenged with quite a
number of people that have become laid-off due to the lack of work, who are no longer able to
pay off their dream home during this recession. Many incentives and marginal benefits comes
with being a new home buyer due to the unnecessary inventory of homes throughout the area.
Banks are also pressured by the slow market to lower their interest rates to buyers that are
qualified. Therefore, because my credit score is above 700, I am basically guaranteed a good
APR from the Federal bank. If the government was to run low on funds and the economy was to
grow at a fast rate, then the interest rates would increase once again which is why it is important
to buy and finance a home at this time.
After looking over all of the cons and pros of buying a house in the current
market, I have concluded that it is the perfect time to purchase a home for my family and I. The
government has been influenced by the recession to increase incentives for recurring as well as
new buyers, in addition to low interest rates and the large amount of properties to choose from. If
the market was balanced, unemployment was at an all time low and inflation wasn't so high, I
believe wouldn't be able to afford the house I wish to purchase. If the housing market had not
fallen and prices had dropped to comparable prices, then I fell I wouldn't be able to afford the
over-priced properties. According to Business Week (2006), "This housing cycle is different. In
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the past, housing downturns have been the result of high interest rates and broad economic
weakness leading to rising unemployment. This time, housing is going through its own cycle,
largely independent of wider economic conditions. The economy outside of housing remains
solid; while household incomes are growing, unemployment is low. Thirty year fixed mortgage
rates are hardly onerous at 6.5% in mid-August." For new home buyers, the tax credit is a great
incentive; without it, I wouldn't even consider buying a new home. Prices are inflated when the
economy is booming due to the increased demand for all goods. This includes the housing
market. Government spending would have to be decreased while the interest rates will skyrocket, doubling our monthly payment and ultimately result in losing the house due to the lack of
payment. Therefore, I am only able to buy a new home in this economy and be able to take full
advantage of the incentives and market which comes along with the market, while making the
best use of my marginal benefits and are worth all of the subsidiary costs.
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References
Cooper, J. (2006). Housing: The Roof Won't Collapse on the Economy. BusinessWeek,
(3999),
21-22. Retrieved from Academic Search Complete database.
Gaberman, R. (2009). The Benefits of Low Interest Rates. Business West, 26(10), 45.
Retrieved from MasterFILE Premier database
(n.d). Housing weighs on the economy.(2009)(Editorial Desk)(Editorial). The New York
T imes, 159(54873), A18. Retrieved from Gale: Opposing Viewpoints
Mankiw, N. G. (2007), Principles of Economics, 4th ed. Mason, OH: South Western Cengage
Learning.
Resource Center (PowerSearch) database.
National Association of Home Builders. (2009). Federal Housing Tax Credit for FirstTime Home Buyers.