A New House Decision, Essay Example

Home ownership is considered one of the great anchors of the American dream.  This dream, however, comes with a hefty price tag.  It is not a decision one can make without considering the potential economical benefits and impairments that goes along with it.  Purchasing a new home is a long-term financial decision, where the variables can change drastically along the way.  Job security, economic status, marginal benefit versus marginal cost, and the trade market are just a few of the uncontrollable variables to take into account.  It is essential to consider these economical factors when deciding when and if purchasing a new home is the best feasible option.

First, one would have to factor the marginal benefit and the marginal cost that is associated with purchasing a new house.  It is safe to assume that one of the biggest delays with purchasing a house; is the cost associated with it.  The length of the obligation, there is not way to determine what will be going on with our economy ten days, let alone ten years from now.  Certain professions could become completely obsolete.  The house may lose its value or require substantial repair.  Current personal practices will have to be revised to keep up with the cost associated.  Shopping, dinning out, and the evening away with friends will have to be budgeted for. The previously accustom frivolous spending habits will cease to exist.  The benefit that goes along with home ownership is long-term as well.  Owning a home is an investment, a means of financial security.   No more giving money to a landlord for him to build equity and make a profit off of you.  Communal living will become obsolete.  The factors will change from individual to individual, but when the marginal benefit out weighs the marginal cost that is when purchasing a home is the best options.

One of the principles of economics that would directly relate to purchasing a new home would be opportunity cost.  People face this decision every day, what will I give up in order to be able to get this alternative.  I want these new shoes; I will pack my lunch for a week in order to afford them.  I am buying a new car; I will have to cancel my spa membership.  What can one personally give up to afford a want, and at times, a necessity?  There are a few things in life that are inevitable for human survival, shelter being one of those.  If an individual is renting, one may be investing more in “borrowing” a home than the cost incurred for owning one.  According to CNN’s Les Christie, “The real estate web site Trulia, buying was cheaper than renting in 74% of the country’s 50 largest cities in July.” (Christie 2011)  Exploring the economic opportunity cost associated with purchasing a home may reveal it more practical to purchase.

Another factor to consider in the home buying rationale is the strength of the economy.  This directly has an effect on the marginal benefit and cost associated with purchasing a new home.  A decade ago, the housing market was on fire.  Property value was continually increasing, the economy was visually flourishing, and the time to buy a house was “now”.  Banks, Realtors, underwriters, and buyers all took advantage of the alternative lending practices going on.  Homeownership was made to be obtainable, even in situations that economically made no sense.  Because of the strength of the economy, this decision seemed sound.  The ability to own a home outweighed the get rich quick scheme that plagues the mortgage market.  Despite the higher interest rates, shady underwriting, variable rates, for many, the marginal benefit still seemed to outweigh the marginal cost.  As we all learned soon enough, that was not at all the true case.  People were in situations they had no chance of getting out of.  The payments were far greater than their incomes could sustain.  Inevitably, they were going to lose their “American dream” along with potentially everything else that held monetary value.  Subprime and predatory lending led to what CNBC titled as US Housing Crisis is Now Worse than the Great Depression.  “Indeed, the foreclosure problem is unlikely to get any better with 4.5 million households either three payments late or in foreclosure proceedings. The historical average is 1 million.”  For many, the American dream of home ownership quickly turned into an economic travesty.  The economy was not far behind with increased foreclosure and a housing market with very minimal demand.

After these facts surface, home buying took a whole different playing field.  Lenders tightened all regulations, requiring as much as 20% down and credit ratings that were almost flawless.  The government stepped in to tighten up regulations to prevent such events from occurring again.  Consumers became more fearful to enter this type of market when their investment had very little guaranteed return.  Foreclosed houses went untouched, costing banks millions of dollars from this stagnant industry.  This changed the marginal cost to be far greater than the benefit for most consumers.  Why take such a large risk in a declining economy?  The government’s attempt to stimulate the economy and counteract the concerns in the housing market, implemented many different incentive programs for first time and repeat home buyers.

Economics assume that for the most part, people are rational.  Under this assumption rational people “systematically and purposefully do the best they can to achieve their objectives, given the opportunities they have.”  (Mankiw 2007)  With this economic principle of people being rational, the cost and benefit of buying a home will be considered if circumstance change.  For instance, the government expected people to see the opportunity of buy a home, by implementing a means for them to get money back.  Incentives, is a principle of economics that is used to induce an individual to act on something, in this case, buying a new home.  Owning a home is intended to provide financial security, tax breaks, and other monetary as well as nonmonetary benefits.  Prior, the housing market was not appealing due to the current economic status; however after the incentive, buying a home became more appealing to many consumers.

Worker, Homeownership and Business act of 2009 extended an $8000 tax credit for qualified first time home buyers who purchase a new residence based on specific set criteria.  This act alone changed the demand in the housing market, by essentially putting money back into consumer’s hands.  This changed the marginal value and cost ratio for many.  With the market in the position it has been in, mortgage interest rates are down, and there is substantial property available for purchase.  For a potential homeowner, this incentive, along with a market being on an incline, could be viewed as economically smart to purchase a new home.  “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 the 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.” (Cooper 2006)  With the current incentives in place as well, for many, it makes it almost impossible to find it economically inappropriate to purchase a house.

International and domestic economy trade also play a role in the strength of the market.  Domestic economy consists of factors that include trade, level of consumption and investment, as well as government spending.  The greater the demand, the greater the potential return.  Any substantial changes in these components will have an affect on the economies strength or weakness.  Similarly international trade affects the economic market at well.  The more the government spends, the more the GDP will increase.  This will create more jobs and a better economy.  If we decrease spending and trade, it will inevitably have a reverse effect on the market.  International trade can affect the housing market in other ways than just jobs and the economy.  Some materials needed for building a home are imported, and if the international market it on the fritz, getting such products could become quite costly and time consuming.  This will slow down the building process, as well as potentially increasing the cost to the consumer.

There are certain factors that would prevent a personal decision to buy a house.  The first would be if a sizable down payment was necessary.  You estimate you are buying a $100,000.  A typical amount to require down would be 20%.  That would require an individual to have $20,000 available to purchase a house that is a lot of money to have free and available.  The higher the price of the house, obviously the amount of money necessary to have down in order to purchase it will increase as well.   Whereas a budget could afford a $300,000, is one willing to deplete their safety net of $60,000 to buy this house?  Another condition that could divert the desire to purchase a home would be if there was any type of instability in the job market.  For example, the car industry is on a steady decline.  As an industrial worker for Toyota, there is a very real possibility that jobs will be eliminated due to the declining demand for the product being manufactured.   It would not be economically feasible to commit to such a large obligation if the ability to pay for it is in question.  Family obligations, health issues and college expense are variables that could make if economically unfeasible to make this type of purchase.  These are just a few factors that could directly affect a person’s decision to buy a house.

Taking into consideration the principles of economics directly relating to purchasing a house, an individual will be able to make an educated decision on if home ownership is the right step for them.  Knowing the economical status, job market, and housing industry will also be viable guiding factors in making the best personal decision.  Taking on a financial obligation of this magnitude can have long-term consequence if it is entered into lightly.  Assuming the factors are all favorable, a new home investment is a very sound decision.

References

Christie, Les. (2011) Buying Is Cheaper than Renting in Most U.S. Cities.  Retreived from: http://money.cnn.com/2011/08/16/real_estate/buy_rent/index.htm

Cooper, J. (2006) Housing: The Roof Won’t Collapse on the Economy.  BusinessWeek, p. 21-22.

Mankiw, Gregory N. (2007) Principles of Economics.

US Housing Crisis Is Now Worse Than Great Depression.  CNBC.com. Retrieved from: http://m.cnbc.com/id/43395857/US_Housing_Crisis_Is_Now_Worse_Than_GreatDepression