Buy_or_Not_to_Buy

A New House- To Buy or Not To Buy XECO/212 March 6, 2011 A New House- To Buy or Not To Buy Many times the way we act and the decisions that we do from day to day, are affected by economics. We use, without realizing it or realizing it, economic theories to aid in whether I make a decision or I do not make a decision. This can also be said for decisions such as to purchase a new house. This paper will evaluate how economics affect one’s decision to purchase a new house. The decision to purchase to a new house is not an easy or small decision. It is considered to be a milestone and can be a lengthy decision to make. The reason for this falls back on the price of a house, how much you will end up paying over your 30 year term, the responsibility of being the home owner versus being the renter, and many other factors. When one is considering purchasing a home, chances are they have a savings for a down payment. When one decides to purchase the home this would deplete their savings. The demand of houses is highly price elastic. It has been said that when a purchase takes a majority of one’s income, the more price elastic the demand will be. For example, in the case of purchasing a new home, this will take spending a major portion of one’s income. It is because of this that not everyone makes the decision to purchase a home. When someone goes from renting to being a homeowner it is a big shift as far as responsibilities would be concerned. This change alone could make a first time homebuyer second guess their decision to purchase a home. These would be some of the reasons that purchasing a house is a difficult decision for most. There a many principles of economics that can be applied to making the decision to purchase a new home. First principle would be dealing with tradeoffs in which one would have to face when considering to purchase a home. Any decision we make comes at some kind of cost. In this case, a large portion of one’s savings would be used when purchasing a new home. The tradeoffs in this case would be that the things they could have done with the savings that the spent to purchase the house. There are many other thing that the money that would be used to purchase a home to be used on. It could be used on buying a new car, going to college, sending a child to college, vacation, and so many other things. Due to this being such a major chunk of one’s income and/or savings, one needs to really think about the pros and cons in purchasing a home. One would want to think about the benefits of purchasing a new home which would be a new environment, assuming that it is a new home it would be cleaner which would be beneficial to your health, possibly larger space, more storage, and many other benefits. Some possible cons could be being responsible for all upkeep and repairs, mortgage payment could be higher than rent, additional costs such as homeowners insurance and many other things. Having said this, a person will only decide to purchase a home when he or she is fully ready to accept all the advantages and disadvantages that come along with making this type of a decision. After all it is not like buying a pair of jeans and deciding they just do not fit right and take them back to the store. The next principle I will use to apply to the decision to purchase a new house can be found in Principle number 2: The Cost of Something is what you give up to get it. In this principle the text mentions “opportunity costs”. The text describes this “The opportunity cost of an item is what you give up to get that item (Mankiw, 2007).” Opportunity cost refers to the value of the next best alternative which one has to give up. This would include both explicit and implicit costs. Explicit costs, in the case of purchasing a new house, mean the total amount of money that one would spend on a new home. With implicit costs, this covers all the non-monetary costs. For example, it could be things like, familiar (maybe even good) neighbors or even the loss of bonding time should the choice had been a nice family vacation. Marginal costs and benefits will be the next principle of economics we will be applying to the purchase of a new home. When one is in the position of making a decision, the decision will only be made if the marginal benefits are greater than the or at least equal to the marginal costs. In this scenario, some marginal benefits that could accompany the decision to purchase a new home could include being in a better area, closer to school or in a good school district, and local services. Another principle of economics that I would apply to the decision to purchase a new home would have to be the incentives in which one is presented with. If one was to purchase a new home, for example, they could be entitled to a tax credit reduction. Another incentive would be the first time homebuyer tax credit. However, there can be a downside to this incentive. I was reading on the IRS (Internal Revenue Service) site and found this: “Some individuals will be required to repay the credit (First-time Homebuyer Credit, 2011).” As discussed above, one will need to consider the marginal benefits to the marginal costs before making the decision to buy a new home. A better environment, more room, closer to local services and schools are all example of benefits. When looking at the new neighborhood, if there are facilities like gyms, sports complexes and/or shopping malls can be considered as benefits as well when purchasing a new house. However, costs of purchasing the new home will be the amount of money which one has to give up to purchase the new home. When making a purchase of this size, it will deplete the amount in one’s savings account which will change the amount one could spend on other goods and services. Some examples would be gas/diesel, food, hair care, gym memberships, and many others. The marginal costs and marginal benefits of the decision would depend on the income of the homebuyer as to what they have to give up or what would benefit them. This is known as marginal analysis. “Process of identifying the benefits and costs of different alternatives by examining the incremental effect on total revenue and total cost caused by a very small (just one unit) change in the output or input of each alternative. Marginal analysis supports decision-making based on marginal or incremental changes to resources instead of one based on 'totals' or 'averages.' (Marginal Analysis, 2011)” When someone is in the lower income bracket the decision to purchase a new home may not be as easy as say that of a person in a higher income bracket. The state that the economy is in will be one of the factors that could affect the marginal costs and marginal benefits that would come with purchasing a new home. When the economy is in good health, the homebuyer would have things like higher wages and stable jobs because the Gross Domestic Product has grown as well as the economy. Consumers with higher incomes would have more purchasing power and this would lower the effect of purchasing a new home would cause someone with lower income. On the other hand, when the economy is in poor standings such as our current economy (the recession), the Gross Domestic Product has fallen and has negatively affect consumers. When a company’s business has slowed, for example, the company would then be forced to lay off or fire employees in the hopes to lower operation costs and stay open longer. When something like this happens it then creates a downward spiral. It creates higher unemployment rates and this could then cause wages to lower as well. Because of this, it causes citizens to have smaller amounts of disposable income and is less likely to part with any money unnecessarily and certainly would not be looking into purchasing a new home, more than likely. In the case of the lower disposable income, the marginal costs would outweigh any marginal benefits because if they were to spend such a big chunk of their income then they would not be able to afford the necessities as well as could end up homeless later on. Domestic economy, as well as International trade, plays an important role in determining the strength of the economy. The domestic economy is made up of government spending, trade, level of consumption, and level of investments. Any type of changes in any of these components will affect the strength of the economy one way or the other. A raise in government spending, for example, will help to raise the Gross Domestic Product. This will cause economic growth and help to raise wages and jobs available. However, it has a negative affect when the government spending has lowered. The economy’s balance of trade is affected by international trade. Gross Domestic Product will rise if the balance of trade rises and if the balance of trade was to lower so too would the Gross Domestic Product. Say that there was a shortage on import materials, for example, this would lower the supply on houses available and can even cause an increase in the prices of the houses that are available. This will all have impact on one’s decision to purchase a new home or not. There are a lot of other decisions and scenarios in which result in a different decision made. The decision would be not to purchase a house. This could possibly include sudden loss of job which would lower one’s income. This would create uncertainty about the future and would most likely not be in good standing to be comfortable purchasing a new home. Other possible reasons that could cause one to decide against purchasing a new home could be natural disasters such as tornados, hurricanes, and earthquakes or possibly even terrorist attacks. If the house you were interested in was in Tornado Alley, your home owner’s insurance would more than likely be higher because of the addition of the flood insurance or what not, which would add to expenses for your new purchase and could be enough to stop you from purchasing all together. One thing that would weigh my mind on purchasing a home is if one of my kids or other family members were ill. Here is an example of this. I am currently undergoing test after test to find out if I have cancer or not. Now if the results were to come back and say that I have cancer, I would definitely reconsider on making the down payment on the house my husband and myself are currently renting because there is no way he could afford this if I were to pass. Not to mention this would take much of our disposable income to cover doctor visits, medication, and treatment. As previously stated, there is a lot to consider when one makes a decision to purchase or not purchase. It includes thinking of right now (current level of income and job stability) and thinking of the future as well. When considering the purchase of a new home the best thing to do is ask ‘What if…” to help you fully know if you should really purchase a new home now or wait. The housing market is decreasing due to the recession we are in as well as the unemployment rates. The conditions to purchase a home right now are not exactly ideal. In conclusion, the factors that needs attention when considering to purchase a new home are never the same nor is the economy, the level of income or size of our family. It all changes all the time. People should take some time to think about this decision long and hard before purchasing a new home because as I said above, it is not something you can just take back to the store because you do not like it and be in the same position you were when you went into it. Consider all the factors before deciding “To buy or not to buy.” References First-time homebuyer credit. (2011, January 25). Retrieved from http://www.irs.gov/newsroom/article/0,,id=204671,00.html Mankiw, N. G. (2007). Principles of economics (4th ed.). Mason, OH: South-Western Cengage Learning. Marginal analysis. (2011). Retrieved from http://www.businessdictionary.com/definition/marginal-analysis.html