A New House – Decision Week 9 – Final Project By xxxxxxxxxxxxxxxxx XECO212 – Principles of Economics 25 April 2010 Sara Huter A New House – Decision Many of the decisions we make as consumers are directly related to the current state of the economy. Moreover, as consumers are faced with life changing purchases, they will weigh the marginal costs and benefits associated with their purchase. This is most apparent when there is a decision to purchase a new home. Throughout this paper I will explore the economic principles that directly relate to this type of purchase.
As well, identify the contributing factors that help shape the strength of our economy. The decision to purchase a new home can be a daunting and challenging choice. As current homeowners will testify, various factors will contribute to this life-changing decision. One of these factors includes trade-offs, which they will face before and after their purchase. This trade-off is one of the fundamental principles of economics; stating that we must give up something to receive something else. For a perspective homeowner this trade-off can be a reduction in the amount of available purchasing power.
Once the purchase has been completed, the homeowner would be required to spend any extra money on their mortgage payment. Or for a couple who travels, it could be the loss of multiple vacations to popular destinations around the world. Moreover, this first principle defines that every decision comes at a cost. By deciding to purchase a home, one may have to forego other decisions such as buying a new vehicle. Looking at the second economic principle, which states the cost of something is what you give up to receive something else, can be easily identified with the purchase of a house.
According to the chapter text, this is defined as the opportunity costs, making a decision which requires the comparison of the costs and the benefits of a substitute action. The decision to purchase a house is something that weighs heavily on the hearts and minds of the perspective homeowners. Many people who have purchased homes have given up various things for their purchase. As stated earlier, this could be reduced travel, a vehicle, or something else of value. It could also be more implicit costs, including; finding new neighbors, proximity to community resources, or moving near family members.
Regardless, people have to make these types of decisions. When my wife and I, decided to purchase our current home, we were forced to go through this process also. These decisions are our way of life. As the third principle of economics states, rational people think at the margin. According to the chapter text, marginal changes are small incremental adjustments to a plan of action. Measuring the marginal costs and the marginal benefits during the purchase of a home can be a cause for debate between many buyers. During my most recent purchase of a home, my wife was concerned about the proximity of elementary schools to our new house.
To purchase this home, my family was deciding that our children would now be required to ride the bus as opposed personally driving them to school each day. The benefits of our long-term goal of raising our children in a well established neighborhood far outweighed our desire to drive our children to school every day. In this case, the marginal benefits outweighed the marginal costs. The final decision, which help our family purchase a new home were the incentives offered by our lending institution and the federal government. Just like the fourth principle of economic states, people respond to incentives.
The purchase of our home was in the middle of the recession right after the President Barrack Obama passed the American Recovery and Investment Act of 2009. We responded to the incentives offered under this bill of providing tax credits to homeowners. On top of this incentive and due to the recession, we were able to get a competitive interest rate, which sealed the purchase of our new home. The strength of our economy weighs heavily many individuals especially when purchasing a home. When the economy is in a recession, the price of a house will typically fall over a given period.
If the consumer purchases a home for a given price there is a decent chance that the value of the home will fall below the purchase price. This example was most recently seen when the residential housing bubble burst, which is said to have started our current economic recession. Once the marginal benefit is no longer equal to the marginal cost, the consumer will not be inclined to purchase a new home. A decline in the market means lower interest rates as well as lowered housing prices, which can be seen as a marginal benefit for our decision to purchase a home .
When the downturn in the economy started, our family was in a position to purchase; therefore we were able to find a good deal on our home as well as qualify for financing. As the housing market begins to stabilize and the marginal benefit has started to become more equal to the marginal cost thus other perspective homebuyers will begin purchasing homes again. Thankfully, our family was fortune enough to take advantage of the marginal cost imposed by the recession and purchase a well priced home. One of the main benefits of purchasing a home is the tax dedications that are available to each of the home owners.
The Tax Reform Act of 1986 used to be applicable to both businesses and individuals however in its current form it only in place to help invite people to purchase a home. Removing this tax deduction has many pros and cons. Placing a tax credit on a specific market can be seen as subsidizing; in an inelastic market this causes the prices of goods and services to go up. By removing this tax deduction could help housing prices go down, in-turn making housing more affordable. Depending on your view of politics could depend on the views of government spending and taxes.
Typically, I am not in favor of a bigger government and I do support conservative spending. I purchased my home because I could afford it and I did not do it to take advantage of tax benefits. Even if the government repealed the housing tax credit, I doubt it would have affected my decision to purchase. The strength of our economy is dependent upon international trade and the domestic economy. The domestic economy is composed of trade, consumption, government spending, and investments. Changes to anyone of these factors could potentially have an effect on the strengths of our economy.
A more recent example of one of these changes can be seen in the stimulus plan enacted by President Barrack Obama. An increase in government spending is a direct investment in local economies since each company is required to employ additional workers to satisfy the needs of the job. As the business cycle continues to turn, additional jobs will be added reducing unemployment and increasing GDP. Conversely, if the government stopped or reduced spending it would reduce the availability of jobs and increase unemployment.
A subtle balance is important for a stable economy but unfortunately ours is in a fragile state and requires this type of input. Another factor that influences our economy is international trade. Just like the domestic economy, when there is an increase in trade the GDP will rise. An increase in this area helps to add to economic growth and stimulate jobs. On the contrary, a decrease in international trade will lower GDP, reduce jobs, and lower wages. International trade can also affect housing prices because a majority of building supplies are imported from other countries.
A rise of price in any of the building materials could spark a rise in housing prices. Looking back at my decision to purchase a home, I confident that other conditions or situations could have led to a different conclusion. As stated earlier, my wife and I purchased our home during the valley of the recession. We took advantage of local and government incentives to help us purchase our home. If it were not for some of these programs, including the $8,500 tax credit, I am confident we would have waited a little longer to purchase.
Finally, The decision to purchase a home requires a lot of thought and even more patience. As I have shown throughout this paper, the decisions we make as consumers are directly related to the current state of the economy. Consumers continually weigh the marginal costs and benefits for majority of purchases. The thought process behind the decision is not as important as the decision to purchase. This is what drives the principles our economy and international trade. As well, it helps to identify the strengths of our economy.
References Mankiw, N. G. (n. d. ). Principles of Economics (4th ed. ). : South-Western College Pub. Tomlinson, S. (Speaker). (2008). Understanding the Role of Price [Video podcast]. South-Western Cenage Learning. Retrieved from http://tomlinson. swlearning. com University of Phoenix. (n. d. ). Principles of Economics. Retrieved from University of Phoenix, XECO212 – Principles of Economics website. US Treasury. (2009). Track the Money. Retrieved from http://www. recovery. gov/Pages/home. aspx