The decision of buying a home is very crucial in one's lifetime. The experts argue that purchasing a home is a significant decision made by a person. The decision gets reinforcement when one gets married and has children. In making this important there are some factors which should be put into consideration. This essay reviews the various principles of economics as one of the most important factor in regard to the purchasing of a new house. It also spells out the effects of the situational economy on the decision.
New House Decision
In making a decision to buy a house, it is necessary review all economic and financial status regardless of whether they are global, national or individual. The existing economy plays a significant role in making a decision whether or not to purchase a new house. The major economic principles are useful to the buyer when considering the aspects associated with the new house purchase. A Ukrainian-American economist Nicolas Gregory Mankiw, came up with the ten principles of economics which are based on decision making as the fundamental aspect of any economy. In making serious financial decisions, the comparison of marginal costs with marginal benefits is necessary. Also, the disadvantages and advantages of the house purchase are weighed and incorporated in the process (Bauman Y. 2002).
The first principle to be considered in my purchase is "Tradeoffs" which is about the willingness of one to part with one thing for another one. For instance, I will need to sacrifice some monetary means when buying a house. The second principle which is "The Cost of Something Is What You Give Up to Get It" should be considered. In order to purchase a beautiful home, I will have to sacrifice opportunity cost; i.e. I will cut-down my expenses on entertainment, clothing and food. Marginal thinking is the third principle and it helps in rational thinking and it is essential for better financial purchases and decision. This fourth principle implies that incentives are very crucial in market analysis. Markets, the sixth principle, can also be an important aspect when considering buying a new house. Throughout a certain period of time, markets change due to national and international economic situation (Bauman Y. 2002).
The government plays major role in processes of buying new homes. In respect to this, the current President of the United States has implemented an $8,000 tax credit. 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 United States government increases the demand for housing by placing more money in the citizens' hands by increasing its spending and decreasing taxes. The consumer's demand for housing will increase if the consumer has more money to spend. If the demand for houses increases, then there will be a significant increase in the supply as that demand is fulfilled (Arnold A. 2008).
I am aware of the principles that are essential in making a sound 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 personal finances, that my family and I are able to afford a prestigious home at a cost of $300,000. I will search for a home that meets all my requirements, and can choose to lead a comfortable live instead of a month-to-month basis. If I choose a house whose cost exceeds my budget, I would not have a demand for it; therefore, this will result to losing the money as well as the house. My target house costs $268,000 and I think of making an offer. However, I don't have any amount in cash. My only other option would be borrowing money from the Federal Bank in order to purchase my dream home. This is due to low interest rates available in the economy.
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 $1,000 a month for the rental home I reside in. However, financing my own home will cost me approximately $1,500. Decreasing family spending habits, working overtime, reducing the costs for entertainment and buying food in bulk will have to be the opportunity cost.
When buying the new home, marginal costs and thinking are also placed into effect, the difference between the prices 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 since my dream house is located near such important institutions. If the marginal benefits exceed the marginal costs, then it would be of advantage for me to purchase a home instead of paying regular rents for the same.
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 pendulum since it is 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 come 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 (Gregory N. 2004)
After analyzing all the possible cons and pros of buying a house in the current market, I have concluded that it is the perfect time to purchase a home. 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 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 sky-rocket, 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 (CyberEssays)
People should purchase their own homes/houses because there are numerous benefits attached to the same. They range from economic to emotional or mental benefits. For instance, a homeowner will benefit from several tax incentives, such as the property tax and the mortgage interest deductions. First-time home buyers will realize that their real estate property taxes are fully deductable, and those with a mortgage balance that is lower than the home's worth will benefit from a complete deductable mortgage interest. Also, buyers feel proud of themselves as they have their own places. They are in a position to do anything they desire with their houses. Finally, owning homes helps them to have confidence in their financial standing and ability to support their families.