Values

For many people purchasing a new home is one of the biggest purchases they will ever make. It is a decision that requires a good financial plan, and if there are any bad decisions made those decisions will have long term consequences. As we have seen over the last few years some people purchased homes will little regard to the financial impact that it would have on their lifestyle. Buying a new home should not be an impulse decision that a person makes. First, the prices of houses are typically very high, and purchasing a new house will greatly deplete the savings of an individual. The demand of houses is highly price elastic as we have seen due to the housing bubble. Economic theories state that the larger the proportion of income a certain purchase requires, the more price elastic the demand will be. With the costs envoled in purchasing a new house, it will require the spending of a large proportion of a person’s income, and this will greatly lower the person’s purchasing power when they make the decision to purchase a new house. A few of the principals of economics that can be used when purchasing a new home are people face trade offs, people respond to incentives, and the cost of something is what you give up. When purchasing a new home each decision comes at a cost, and each cost should have a good trade off with it. The costs to purchase a new house will deplete a large portion of our savings. However the tradeoffs for the same amount of money could be sending our childern to college, retiring earlier, or purchasing a new vehicle. When purchasing a new home the pro’s and con’s need to be evaluated, and the obvious and implicit costs of buying the new house need to be considered. Additionally another principal known as “Scarcity” needs to be looked at, and it is when economists study situations where needs or wants exceed means. Therefore, people have to make choices. (Slembeck, 2006) After comparing the financial obligations with purchasing a new home the marginal benefits and marginal costs that influence the decision of purchasing a home should be looked at. Some of the benefits and costs would be upkeep, added room, insurance, interest paid, schools, and crime rates are just a few examples. When purchasing a new home is it important that the benefits overcome the costs of the purchase, or buying is not a good idea. This is what some people would call “the biggest bang for your buck.” Another unseen cost of buying a new house will be when a person moves from a familiar environment to a new and less familiar environment. This can be a life-changing experience which may be scary to some. All these factors combined can make the purchase of a new house a very difficult decision to make. The strength of the economy as a whole can affect the marginal benefits and the marginal costs when making a decision to purchase a new home. Each day we make decisions based on the econcomic conditions that we are encountering at that time. The economy is always changing, and decisions such as buying a new home have to be based on current and future economic conditions. When there are imporvements in the economy it leads to lower unemployment rates, higher consumer spending and confindence, higher interest rates, and higher inflation. However when the economy is in a downward movement you will based your decisions on the following a weaker job market, foreclosures, decline in home values, and tighter credit conditions. The tendency in the economy is for the quantity demanded and the quantity supplied to move toward an equilibrium price at which the quantity producers are willing to produce is identical with the quantity consumers are willing to buy (Banaszak, 1987). In today’s economic condition a person must look at making a long term decision based on short term conditions. Even though the prices of homes is declining it is very hard for a person to obtain a loan from a bank, because of the weak labor market. The government intervened in the housing market, and gave new home buyers a one time 8,000 dollar tax credit and a 6,500 dollar tax credit to investment home buyers. This move by the government was to help slow the down turn in the housing market, but in reality it artifically drove up the demand in the housing market. Now that the tax credit has ended it is difficult to determine the actually bottom of the housing market. Purchasing a house is a massive investment that has to be maintained over a long period of time, and if you buy at a inflated price it will take time for you to recoop your money, because you will see a fall in your investment price if the market falls again. During the last few years the government has been proposing the idea of eliminating the mortgage interest tax deduction for home owners. The National Association of Realtors, for instance, have in the past argued that full removal would decrease home prices by up to 15 percent (Cato, 2010). This figure largely is based on how high or how low interest rates are at the time of the deduction though. However, eliminating the tax deduction now would not be wise by the government; because it would create an adverse effect on the economy. It would be making currently stable homeowners more acceptable to foreclosure. The elimination of the tax deduction would strongly influence my decision in purchasing a new home at this time, because the tax deduction helps when looking at a house that is well within your budget and one that is just outside of your budget. The tax deduction helps get people into a better house for a lower overall price. The decline in the economy was due in large part because of the housing market, and the economy’s return will be in large part on the time it takes for the housing market to rebound. While the economy is rebounding slightly many people are unable or unwilling to make large purchases such as a new home. The availability to loans from banks and the new financial regulations passed by Congress will mostly like make people wait on purchasing a new home. These factors also influence other purchases that have to be made when buying a new home. The costs of insurance, repairs, taxes, and the ability to get equity for any repairs that may need to be made are all influenced by the state of the economy. The market is a place of risk versus reward, and like in a casino you are playing the odds. Right now due to the state of the economy and government spending I personally would not purchase a new home. Interest rates rising in the future and the eventual rise in inflation would make it very difficult to make a profit or break even if you had to resale a home that you purchased in today’s market. The domestic economy and international trade policies play important roles in affecting the strength of the economy of all the countries involved. Our domestic economy is consists of components such as government spending, trade, level of consumption, and level of investments. Changes in any of these components will affect the strength of the economy. For example, an increase in government spending will increase the GDP of the country. This increase will result in economic growth which contributes to increases in wages and jobs. The opposite can happen when the government decreases spending if the private sector is not stable enough to support it. International trade policies affects the economy’s balance of trade in regards to imports and exports. When balance of trade increases (exports), the country’s GDP will increase. This will result in an increase in economic growth which will allows an increase in wages and jobs in the market of those products being exported. However when balance of trade falls (increase in imports), the GDP falls and a decline in wages and rise in unemployment occurs in the market. International trade also affects the prices of houses because we rely on the export and import of materials to construct houses. A decline in imports of materials can lower the supply of houses, and will lead to an increase in the prices of houses due to a increase in demand. This will affect a person’s decision to purchase a new house. There are many decisions and situations that could result in a different decision being made to wether to purchase a home or not. This can include an unexpected retrenchment in the economy which will lower a person’s income. With a decrease in income and the uncertainty about the future of the economy. The decision against the purchase of a new house will likely be made. Another possible reason which can deter one from purchasing a new house will be natural disasters. For example, if it is forecasted that disasters such as hurricans will hit the location of the new home, one will make the decision to not purchase the home at that time. Other reasons that can affect a person’s decision to buy a new home will be the health of a family member. For example, if a family member was suddenly dianosged with a severe illness such as cancer that will require large amounts of money for treatment, the decision not purchase a new house in order to have money available to cure the family member would be made. Lastly, as we have seen in the last few years investments can often be lost in the stock market. If one suffers from an unexpected loss in income due to the stock market crashing, that person will no longer be able to afford a new house, and will change their decision about purchasing a new home. In closing, there are many factors which affects a person’s decision to purchase a new home. It involves considering present factors such as the level of income and job stability of the person purchasing the new home. It is also considering future unseen factors such as if a recession will take place with in the economy in the future. The housing industry in the country is currently receeding or stagnant due to the recession, and a rise in the unemployment rate in the country. Right now people are less optimistic about the future and have chosen to save until there is progress made in the economy. This has lead to a supply increase in the market due to the lack of demand for new homes. This has resulted in a decline in the prices of new homes, and with the end of the tax credit it is hard to predict if the housing market has seen the bottom yet or if it is going to fall farther. However, this can change in the future when the economy picks up, and people become more optimistic about the economy, and begin to spend again. With the uncertainty in the market I would advise to sit tight, because the houses are not going to leave the market, and the deals will only get better.