Buying_Your_First_Home

Deciding to buy a home is a major decision that most of us will face at least one time in our lives. Not only is it an emotional decision but it is one of the more important financial decisions we will face. There are several factors to consider before making the commitment of such a large purchase. The ten principals of economics will come into play when deciding which home to buy, in what area to buy it, or if you should just rent a home. The domestic economy and international outsourcing has weakened the local economy leading to fear and making financing more difficult than ever. Buying a home has been a major source of frustration for me in the last few months. In this paper I will outline the factors that have lead to my decision to buy a home now. The first of the ten principles of economics says that people face trade- offs. If I decide to spend twenty dollars on lunch today I will only be able to spend five tomorrow. This principle relates to home buying in several ways. If I buy a home in a small town I might be able to get a larger home on a larger piece of land for the same cost as a smaller home in a city. The trade- off would be that I might have a longer commute to work and other amenities. If I have a longer commute I will be spending more money in gas and I would put more miles on my vehicles over the years. A larger home would be nice but a larger home has larger heating and cooling costs. In my experience consumers bills were half as much as they are living in a home. One of the reasons is when you live in an apartment your neighbors are using their heat and air conditioners to cool their apartments so I didn’t have to use mine as much. Time is another cost in owning a home. When you own your home you have to mow your lawn do small repairs that you would normally just call your landlord for. For example, the house that I am renting right now had a leak in one of the pipes that was connected to the master bathrooms’ shower. If I owned this home I would have to work extra hours to pay someone to fix it or I would have spent way too much time trying to figure out how to fix it myself. One of the perks of renting is that I just called my landlord and he fixed it, I didn’t have to pay for anything or spend time on it myself. If rational people make decisions by comparing marginal costs and benefits we have to figure out what the marginal costs and benefits are of buying a home. If we look at the graph below, the margin would be where the red and blue lines cross, where price and quantity meet. Price Quantity If we can buy a home at a price below the horizontal black line it is beneficial. If the price is above the black horizontal line it is above the marginal cost and is not beneficial. The marginal cost is mostly used when selling items. Since a home is an investment you have to make sure you will be able to sell the home for more than it cost you. To find out what price to buy the home and sell it we would use the same formula. If someone has enough money it might be wise to invest in real estate right now. There are several investors buying homes, renting them out, and when the market is back to being a “sellers market” they will sell them. In this case the investor would want to see how many rental properties the market can support while still making a profit. If he buys homes too many homes he will not be able to rent them out and he will lose money. The investor would want to use the same chart to find out the quantity of homes he can rent and at what price to turn a profit. There is an incentive to everything we do. We eat with the incentive of not starving to death. Buying a home has several incentives. The pride of ownership is one incentive. As Americans we strive to outdo our friends, families, and neighbors. Everyone wants the nicest car and coolest clothes; it makes us feel like we belong. The pride of ownership is no different, buying a home will never go out of style. One incentive to buy now is something the government is offering. If you buy a home anytime during 2009 the government will give you an eight thousand dollar tax credit. This is a huge incentive for first time home buyers. First time home buyers are considered to be people who have not owned a home in the last three years. This means that people who have lost their homes to foreclosure three years ago can now buy a home at a very low price and receive an eight thousand dollar tax credit or ten percent of the home’s purchase price. The tax credit does have some limitations, one of them is that a single person cannot make more than $95,000 per year or a couple cannot make more than $170,000 per year. The tax credit has been successful. In fact it has been so successful that law makers are purposing that the government extend the tax credit, increase the tax credit, or make it available to all home buyers instead of just first time home buyers. Not only does this tax credit appeal to potential home buyers as an incentive but it also relates to another principle, the government can improve market outcomes. I in no way blame the government for the housing market’s current condition but I do believe it is the governments’ responsibility to improve the housing market. Another way the government can affect the housing market is adjusting the interest rates. Even thought the government doesn’t directly change interest rates it does have some influence. Interest rates are determined by what the ten year Treasury note does. TAXES   References First Time Home Buyer Tax Credit Frequently Asked Questions 2009 http://www.federalhousingtaxcredit.com/2009/faq.php#1 USA Today Tax Credit for Home Purchase Could Rise 2009 http://www.usatoday.com/money/economy/housing/2009-06-22-homebuyer-credit-may-be-extended_N.htm North Florida News Daily Who Decides What Mortgage Interest Rates Are' 2008 http://www.northfloridanewsdaily.com/News/2008/0804/mortgage_report/