A New House-Decision
Coretta Charles
Axia College of University of Phoenix
July 3 2010

There are many advantages that come with purchasing a home, but before you take that leap there are many economic condition that one must consider before making that financial decision. In this essay we will look at the market structure, marginal benefit, and marginal cost associated with the purchase of a new home.

Purchasing a new home can be an exciting experience that comes with great benefits. The thought of owning your own home and not throwing your money away on renting is a thought that brings a smile to my face, a place where my family and I can call home, and a place where my kids can play on their swing in the backyard and have lots of fun. I would like to look for a house that is close to my work place with a good school system and a location that has ample amount of places to shop. But before I start to look at a preferred location for my new house I have to look at my finances. I have to find a house that is affordable for me, one that fits into my budget as well as have all the benefits that I’m looking for. Though deciding to purchase a home is exciting, it is a huge financial decision and looking at my finances there are something’s I will have to give up or cut down on in order to get the size of the house I need for my family, in the principal of economics this is called “Tradeoff” giving up something to obtain something else of a greater value.
Sure, if anyone that has the money to purchase a home can do it at anytime that they please, but if you want to get the best interest rate and a competitive price you have to look at the market structure and know when the time is right, although a realtor can help me with the availability of houses in my preferred location and most of the financial aspect of my decision, the ultimate decision comes down to me and my ability to analyze the economy and market structure.
Home ownership comes with a lot of responsibility. You have to think about the amount your mortgage will be, the taxes, and insurance you have to pay to protect your investment. There are some things that I might have to give up in order to get the benefits of being a home owner. One of the things I might have to give up is eating out every night and instead of getting that new Lexus that I have wanted for awhile now I might have to settle for the Toyota instead. But when I look at the comparison of having the Lexus or a new house the benefits of owning my own home comes with a lot more opportunity. When I look at the cost of a new home, I think is it really worth the price. A new home can cost thousand even millions of dollars to purchase, but when I think of the benefits I will gain from buying a new house it makes my decision that much easier. For instance the house that I choose will be a lot bigger than my apartment, my kids will have a backyard to play in, and not to mention home ownership comes with a big tax break and the equity you put into your home you can borrow money from later on in life.
The strength of the economy plays a role in the decision to purchase a house and can affect the marginal cost and the marginal benefits. Also, it will aid in my decision to purchase a house. If the economy is strong then people tend to purchase more goods and services because the demands are usually high. A good indicator of how well the economy is doing is to look at the stock market. A steady increase in the stock market suggests that businesses are profitable and companies are investing in the economy. In the housing industry this means that builders will invest in building new houses to meet the demand of people who have more disposable income to spend and want to purchase a new home. Another indicator of a strong economy is the GDP, this also factors into my decision to purchase a home. The GDP measure a country overall wealth such as the investment of businesses and the income of people living in society. “Because the condition of the overall economy profoundly affects all of us, changes in economic conditions are widely reported by the media. Indeed, it is hard to pick up a newspaper without seeing some newly reported statistic about the economy. The statistic might measure the total income of everyone in the economy (GDP), the rate at which average prices are rising (inflation), and the percentage of the labor force that is out of work (unemployment), total spending at stores (retail sales), or the imbalance of trade between the United States and the rest of the world (the trade deficit). All these statistics are macroeconomic. Rather than telling us about a particular household or firm, they tell us something about the entire economy” (Mankiw,).

In today’s economy with the recession, loss of jobs and the high rate of unemployment people aren’t making home purchases and it has caused a drop in sales for the housing market. This can be beneficial to me since I still have the means to purchase a home. With the housing market being down and home foreclosure at a high, home prices have drop dramatically. To increase the sales of homes and get the economy going again the federal reserve have drop interest rates and the government has added some incentives like the home buyer tax credit. This is an $8000 dollar tax incentive offered to any approved home buyer; the stipulation is you have to close by a certain date in order to receive the tax credit. This will increase home sale and will make purchasing a home beneficial. According to the 4th principal in the ten principal of economics Incentives are crucial to analyzing how markets work.” (Mankiw).

Although these incentives are great government spending does have an impact on the economy. The more money and resources the government puts into the economy like, investing in schools, construction and healthcare this will cause a demand for employment and jobs in the labor force. Ultimately this will keep the unemployment level low and increase customer spending into the economy.

When I look at the incentive that are being offered by the government this makes it a good time to make a home purchase. The reason is because interest rates are very low and this makes the marginal cost of a new house very desirable. The marginal cost of a new house is very desirable because you can generally get more home for your money. There are other programs like the first time home buyers program that help with down payment assistance that are offered for first time home buyers.
Another part of the economy I have to look at is the strength of the international trade. The U.S import and export goods from various foreign countries and this make the U.S economy strong because million and billions of dollars comes into the U.S economy. The international trades affect how strong the U.S dollar is and have an impact on the interest rates and jobs in the U.S economy.
Although, I would like to have a house that is big enough for my family, my price range doesn’t allow me to do so. After looking at the economy I have decided to make my home purchase in the current market. With all the incentive being offered this will be the best time to buy. I have decided to look at houses in the price ranges of $125,000-$150,000 this will be an affordable price for me and my family. Generally people usually go for the 30year mortgage, If I decide to I can get a 15year mortgage that will allow me to pay my loan off quicker, the only down side is my payment will be higher, the idea is to pay less in interest and more on your principle balance.
With my credit score being good I will qualify for a good interest rate, which is based on the current market rate, this will work in my favor and ensure that I pay less interest on the life of my loan. According to Dr Jennifer Baxt, “Your mortgage rate is tied directly with your credit score. The lower your score is, the higher the interest rate will be. As a result, you want to make sure that you have very good credit before you try and get a mortgage. Even getting your credit report sent to you can help because it will give you an idea of what interest payments you will be making. Nothing would be worse than being surprised by the interest rate, and then struggling to pay it down the road. No one wants foreclosure, so be smart before you get your mortgage in order to avoid complications later”. So, it is a good idea to know where your credit is to get the best interest rate. Another thing I looked at is the difference between a fixed mortgage rate and an adjustable mortgage rate.” Fixed-Rate Mortgages Typically the monthly mortgage payment remains the same for the entire term of the loan – allowing for predictability in your monthly housing costs. Adjustable-Rate Mortgages (ARMs) Depending on the type of ARM you choose, your rate and monthly payment will change at specified times (in some cases, within a year, or after 10 years if you choose a 10/1 ARM) based on market rates that change regularly” (FreddyMac2010). In the past a lot of banks were given out adjustable mortgage to home buyers. This caused a lot of people to foreclose on their home because their interest rate jumped to an unaffordable amount and was forced to give their home back to the bank. When I talk to my realtor I will let her know that I am only interested in a fixed rate mortgage.
In conclusion buying a home can be a major financial decision that one must carefully assess. Not only do you have to look at your own finances you have to look at your county’s economic condition and determine the best time to make your home purchase. By doing this you will have the tools necessary to make your decision.

Reference:
Principles of Economics, 4e, N. Gregory Mankiw - © Cengage Learning Retrieved from Axia College University of phoenix.

How does your credit score affect your mortgage interest rate? By Dr. Jennifer Baxt, DMFT Retrieved from: http://www.completecounselingsolutions.com/articles/159/How-does-your-credit-score-affect-your-mortgage-interest-rate%3F

Fixed or Adjustable Rate? Retrieved from: Freddie Mac.com
http://www.freddiemac.com/corporate/buyown/english/mortgages/selecting/fixed_or_adjustable.html