Final_Project_-_New_House_Decision

Final Project - A New House Decision Patricia Henson XECO/212 January 15, 2012 Thomas Bell Final Project - A New House Decision Homeownership is the American dream. Purchasing a home is a major investment therefore the decision must be carefully weighed. A prospective homeowner should have full knowledge of the repercussions and benefits of owning a home. I am a single mom, living in a two-bedroom apartment, my income barely pays the bills and I need more space for my family. Continuing to pay rent will never allow me the chance to own my own home. The following principles of economics will help me to make the right decision. In addition, I realize the economy is the key reason to making my final decision in purchasing a home therefore the strength of the economy, the roles of domestic and international trade must be considered as well. In these economic troublesome times, purchasing a home is major investment therefore certain principle of economics that should be considered to ensure that I am making the right decision to buy or not to buy. N. Gregory Mankiw. (n.d.) states that the first Principle of Economics would be to face a trade-off; to get one thing that I would like, I would usually have to give up another thing that I like. It simply means trading off one goal against another goal (pg. 4.). There are many facts to consider when facing a trade-off to buy a house instead of continuing to rent an apartment. The idea of buying a home is very intriguing but in reality will I be able to afford a home' Let’s consider some important facts: Trade- off: Principle 1 – rent versus mortgage, I presently pay $1,200.00 for rent which includes utilities and maintenance for repairs. Now if I purchase a home, I want to have the down payment and in some cases; there are programs that can help with eliminating down payments such as Neighborhood Assistance Corporation of America, (NACA). In addition, utilities, homeowner’s insurance, property taxes, money for fixtures or major repairs, etc. In addition, the decision to attend college or to buy a house is a trade-off. I decided to attend college to further my education and to obtain a better paying job instead of buying a home at the present time. I know in the near future payments will be made for my student loans therefore I would not be able to afford both. Another principle to consider is Principle 2: The cost of something is what I give up to get. Taking in consideration my decision to attend college instead of buying a home is my opportunity cost; whatever must be given up to obtain some item (Principle of Economics, pg. 6). Therefore thinking like a rational person, I am securing my future with a college degree and I am purposely doing my best to achieve my dream of owning a home one day. I am making marginal changes; small incremental adjustments to a plan of action that will result in homeownership (Principle of Economics, pg. 7). Buying a home is major accomplishment therefore planning, researching the regulation and tax laws will be relevant before making a large investment. Mortgage lenders, real estate brokers, property management must be considered as well. Purchasing a home can be very expensive therefore I will compare the marginal benefits and marginal cost. Marginal cost includes such items as insurance, taxes, utilities, repairs, in general overall expenses. The marginal benefits include tax reduction, expected return on equity, location, better schools, etc. At the present time the marginal benefit will not allow me to take action because other matters such as income and employment security. Whereas, the strength of the economy is concerned, my decision to purchase sooner than later depends on the marginal benefits and marginal cost therefore research is imperative to making my decision to purchase. The marginal benefit and marginal cost in buying a home is based on several factors, mortgage rates, taxes, price, inflation, and household income. The economy is suffering concerning building or purchasing homes. Mortgage lenders, banks, and institutions are skeptical about lending money for large purchases such as a house. Consumers can purchase homes for a lower rate and price, it is harder to get a loan from the banks, mortgage companies, etc. therefore it results in slower economic growth. By implementing the tax deduction on mortgage interest it has helped the housing market to increase in time but if it is removed than the housing market would decrease in sales, making purchasing a home almost impossible. In addition, to removing tax deduction, the negative effect it has on the housing market; government spending and taxes has caused the economy to fluctuate and slow down the Gross Domestic Production (GPD) over the years. Although, some government spending is crucial for a well function economy, the United States is currently over the budget deficit, which ultimately slowed down the economy. Tax cuts helps household incomes but overtime, it is uncertain how long these changes in tax rates, tax cuts and low interest rates will remain. According to the Economic Outlook (2012), “Household spending is likely to be dampened by slow income growth, lost wealth, and constraints on households’ ability to borrow. Investment spending will be slowed by the large number of vacant homes and offices. In CBO’s forecast, real GDP increases by 2.1 percent between the fourth quarter of 2009, and the fourth quarter of 2010 and by 2.4 percent in 201. Given CBO’s estimate of growth in potential output, those GDP growth rates will narrow the difference between actual output and potential output (the output gap) only slightly. Growth in real GDP will accelerate after 2011, spurred by stronger business investment and residential construction. From 2012 through 2014, real GDP will increase by an average of 4.4 percent per year, CBO projects, which would close the output gap completely by the end of 2014). The outlook for inflation is particularly uncertain in this recovery because of the unusual amount of excess capacity in the economy and because of the unprecedented nature of the actions taken by the Federal Reserve during the financial crisis (The Economic Outlook). Investment spending will be slowed by the large number of vacant homes and offices this affects the economy as a whole. My decision is to not make a large investment such as a home at this present time and I believe others who are unemployed may feel the same because of the high rate of unemployment. Some researchers promote that the unemployment rate has moved up from 9.7 to 9.9% since April 2011, it is still a high percent that are unemployed. It is a positive sign, but it will take a while for consumers to rebuild again. I believe the marginal cost outweighs the marginal benefits, based on inflation, unemployment, tax fluctuations, international trade, GDP has not expanded and people are struggling to pay his or her monthly bills. I do believe that the economy will grow in the near future; one solution is to create jobs and job training to increase the level of Gross Domestic Production. The debate over international trade is a controversial issue. Should the United States trade with other countries' Some politicians and political commentators express that international trade allows all countries to achieve greater prosperity, while others may feel free international trade is unfair. Like most economist, I believe free trade is necessary and placing tariffs and quotas benefits the United States with free trading policies. According to United States Department of Agriculture (2011), “The global economic crisis that started in late 2008 has led to a sharp curtailment of international trade, including a short-term decline in the value of global agricultural trade of around 20percent. The U.S. agricultural sector would benefit from a depreciating dollar, it results in high export earnings, high agricultural commodity prices, increased production, and increased farm income” (What the 2008/2009 world economic crisis means for global agricultural trade). “Strong dollars gives advantages to United States consumers and disadvantages to producers as confronted with reduced exports to other countries. Weak dollars increases United States exports, create jobs and in general economic activity” (personal communication, January 8, 2012).” According to Basics Economics (2012), “tariffs are taxes levied on businesses for imported goods. Tariffs raise the domestic price above the world price by the amount of the tariff. The increase in the domestic price will lead to a decrease in domestic quantity demanded, and an increase in domestic quantity supplied. Before the tariff, the domestic price is the same as world price. After the tariff, the domestic price rises. Quotas are restrictions on the maximum amount that may be imported, and have similar effect as do tariffs. They restrict the amount available to domestic consumers and push up the price, resulting in a deadweight loss similar to that of a tariff. The main difference is the distribution of the surplus. A tariff raises revenue for the government, whereas import quota creates surplus for license holders. The government could capture surplus from import quotas by charging a fee for the licenses. If the license fee equals difference in prices, then import quota works same as tariffs” (tariffs and quotas). According to University of Phoenix Application: International Trade (n.d.), a although some arguments are relevant concerning free trade: protecting jobs, defending national security, helping infant industries, preventing unfair competition, and responding to foreign trade restrictions, economist believe that free trade is usually the better policy. In conclusion, the decision to be a homeowner will have to be considered in the near future because of my employment situation. Although, many factors have been considered this is the main reason for why I cannot afford to purchase a home. In addition to my situation, some alarming facts oppose a threat to the overall growth of the economy. According to The Economic Outlook (2012), “CBO expects that the pace of the economic recovery in the next few years will be slower than might be anticipated on the basis of previous recoveries from deep ­recessions, for several reasons: • Economic growth will probably be restrained by the aftermath of the financial and economic turmoil. Experience in the United States and in other countries suggests that recovery from recessions triggered by financial crises and large declines in asset prices tends to be protracted. • Although aggressive action on the part of the Federal Reserve and the fiscal stimulus package enacted in early 2009 helped moderate the severity of the recession and shorten its duration, the support coming from those sources is expected to wane. In addition, under the assumption that current laws and policies remain unchanged—an assumption that is reflected in CBO’s forecast—tax rates will increase in 2011, ­further hampering growth. Thinking like an economist regarding purchasing a new home, the positive outweighs the normative. Normative – what ought to be. Positive – what is. The United States of America, is one of the richest countries in the world, therefore I believe the economy will soon begin to grow, and I also believe that international trading is beneficial for everyone.