A New House Decision
In today??™s world the 10 principles of economics definitely has a role in my decision to purchase a home. Whether it is: People face trade-offs, the cost of something is what you give up to get it, rational people think at the margin, people respond to incentives, trade can make everyone better off, markets are usually a good way to organize economic activity, governments can sometimes improve market outcomes, a country??™s standard of living depends on its ability to produce goods and services, prices rise when the government prints too much money, and society faces a short-run trade-off between inflation and unemployment (Mankiw, 2007, p.4-13). With the 10 principles one also has to look at comparing the marginal benefits with the marginal costs on whether it is a good idea to purchase a home or not. The strength of the economy can affect the marginal benefits and the marginal costs and that will affect my decision on whether or not to purchase a home. The strength of our economy depends upon the domestic and international trade as we trade with other countries and with each other in this country. A decision to buy a home depends upon the amount of money saved, the strength of the economy, and dependability of one??™s career. Thus when I decide to purchase a home I will be looking at several principles directly relating to my decision.
The first principle of economics in my decision to purchase a home is the ninth principle, which is prices rise when the government prints too much money (Mankiw, 2007, p.12). I would think this should cause more wealth, in fact, it does the opposite causing a hardship on the whole economy. The next decision would be society faces a short-run trade-off between inflation and unemployment (Mankiw, 2007, p.13). The best time to purchase a home is during high employment, which in today??™s world the unemployment rate is high along with high inflation making it difficult for anyone to depend upon his or her employment longevity.
The next principle that has an affect on my decision is; markets are usually a good way to organize economic activity (Mankiw, 2007, p.9). This means an invisible hand guides the prices and purchases of desired products needed by the public and by the production and costs of these products. This all means that if I were to purchase a home I need to have furniture in my home and groceries for the family to eat, and this is what we call market economy. If the government forces an entity (builders, banks) to remain at a certain level without raising or lowering prices or production, this causes the market value to fall because the invisible hand is no longer there. My next decision is whether or not trade can make everyone better off (Mankiw, 2007, p.8). An example would be if I could sell my new car for the down payment on the home I am considering to purchase. If I sell my car; my work, school and grocery store need to be close so I can walk it instead of driving. After that, people respond to incentives (Mankiw, 2007, p.7). Right now, as of today there is an incentive to purchase a home and receive $8,000 on one??™s tax return. This program is the first-time home buyer tax credit, and to qualify for this credit one must not have owned a home for the past three years. ???However, in cases where a binding sales contract is signed by April 30, 2010, a home purchase completed by June 30, 2010 will qualify??? (NAHB, 2009, p.1). ???For sales occurring after November 6, 2009, the Act establishes income limits of $125,000 for single taxpayers and $225,000 for married couples filing joint returns??? (NAHB, 2009, p.1). ???The income limits for sales occurring on or after January 1, 2009 and on or before November 6, 2009, are $75,000 for single taxpayers and $150,000 for married taxpayers filing joint returns??? (NAHB, 2009, p.1).
The next principle is rational people think at the margin (Mankiw, 2007, p.6). In the case of whether I purchase a home or not would depend upon whether I make a marginal benefit (profit) above the marginal cost. Buying a home is also determined by the amount of the mortgage payments and the length of the loan. The following principle in my decision would be; the cost of something is what you give up to get it (Mankiw, 2007, p.5). If I to put a large down payment on the home, then I will have to get a part-time job to make up for the down payment, which causes me to give up family time. Finally, the last principle in my decision is people face trade-offs (Mankiw, 2007, p.7). The decision is whether I purchase a home with a hot tub and sunroom or just a hot tub, this also is a deciding factor in the marginal cost. If the price is not much more with both, then I will purchase the home with both. Moreover, decision-making takes in more than just the 10 principles it involves the marginal benefit and marginal cost along with competitive markets and supply and demand.
In comparing the marginal costs and marginal benefits one must look at the competitive markets along with supply and demand in deciding whether or not to purchase a new or used home, or condo. First I am going to check on the different builders and the quality and quantity of the homes they build. In comparison with a track home builder to a custom home builder, the track home builder uses lesser value supplies (Sears windows) than the custom builder (Pella windows), giving the custom home builder the comparative advantage (Mankiw, 2007, p.53). The custom builder sells less to higher income buyers but the track home builder sells more to lower income buyers giving the track home builder the absolute advantage (Mankiw, 2007, p.52). The quantity demanded is the amount of homes both builders build to supply the demand and how much the buyer is willing to pay (Mankiw, 2007, p.65). When the demand increases the quality of each home goes down. Case in point; A home was built too fast since the demand was high. Two weeks after owner moved in, basement flooded several times before owner filed suit against the builder, which caused the builder to redo the badly built basement walls stopping the leaks and pleasing the owner. Later after the demand decreased, another builder completed a home and the home sold, but the builder took more time on it so the quality increased.
???When you buy a home, it is usually going to be one of the most expensive purchases you ever make. However, with that expense comes a valuable piece of property that can be worth considerably more over time. When buying this home, you may want to purchase one that is considered to be ???below market value??? (Davis, 2007, p.1). ???That phrase means the home is priced at much less than what it is truly worth or perhaps should be priced. A home like this will eventually gain in value after the remodeling and fixing up is completed. This may be a better option long term instead of overspending on a brand new house only to find your profits diminishing as the housing market changes??? (Davis, 2007, p.1). In the same way marginal costs and marginal benefits are affected by the strength of the economy.
The strength of the economy is very weak causing a slow down in home purchases. Since buyers are fearful of purchasing new homes, some builders have lost their businesses due because of this problem. This has caused the banks to refuse loans to builders and increase the difficulty for new buyers to purchase homes. ???High marginal tax rates drain vitality from an economy by reducing the incentives to create, to build, to learn, to work, to save, and to invest. Individuals and businesses respond to opportunities when they are not unduly discouraged. High marginal tax rates discourage these activities; low marginal tax rates unleash the strengths of the economy to generate jobs and prosperity. This is why President Bush and Secretary ONeil feel so strongly about reducing marginal tax rates??? (US Department of the Treasury, 2008, p.1). The GDP promotes the strength of the economy. Meaning, I am the buyer and when I purchase the home the seller will then have my money to go purchase more goods and services; this creates a circular flow that never ends with one spending the money the other receiving it (Mankiw, 2007, p.509).
???The Federal Reserve is poised to enact another half-point cut to the federal funds rate target and the discount rate at (or before) the next FOMC meeting on December 16; indeed, the Fed has been keeping the effective funds rate below the current 1% target for some time??? (Seiders, 2008, p.1). ???Stabilization of house prices is an essential part of the stabilization of the housing market during 2009. Price-to-income and price-to-rent ratios have come down toward earlier norms in many places and standard measures of housing affordability (including NAHB??™s quarterly Housing Opportunity Index) have improved quite a bit in recent times. However, these measures do not take tighter mortgage lending standards into account, and an overshoot of prices on the downside certainly is possible??”worsening mortgage credit quality even further and provoking even tighter mortgage lending standards in 2009. That??™s the diabolical feedback loop that must be broken by public policy before the housing sector can truly stabilize and move ahead??? (Seiders, 2008, p.1). If the Federal Reserve lowers interest on bank loans this allows the banks to accept larger and more loans. This increases the economy by helping businesses grow and hire more people, and the people can make more purchases thereby causing the economy to prosper (Money Train, 2007). The discount rate affects the economy by raising or lowering the interest rates that in turn decides whether or not I take out a large loan for the purchase of my home (Money Train, 2007). Open market affects the economy by the federal government buying bonds from the public increasing the money supply (Money Train, 2007). This causes more money to be available for loans. Additionally, marginal tax rates when lowered will help increase the economy and cause better and more international trade.
The roles of domestic economy and international trade affect the strength of the economy in different ways. Aggregate-demand curve and aggregate-supply curve intertwine to meet at a level called the equilibrium (Mankiw, 2007, p.745). Example, I am looking at two houses one is more modern and the other is older; the older one is below market value but needs much work done. The newer one is more costly but needs no improvements; this is one type of equilibrium. In deciding to buy I juggle job longevity with rate of pay, this is the second type of equilibrium. In remodeling the old home I have to decide whether the material is cheaper within the US or cheaper offshore. Since the world market price is lower internationally for steel, the steel posts are cheaper to have made offshore (Mankiw, 2007, p.179). The import tariff so far is low so it is worth buying the product offshore, even though I need six posts the tariff means I can buy only four (Mankiw, 2007, p.184). Given that we are in a recession I still have to think about whether it would be profitable to purchase a home now. Because of the expansionary fiscal policy the taxes are somewhat lower enabling me to purchase the home without such high taxes. Equally important inflation, housing market, and unemployment possibilities could cause me to change my mind on purchasing a home now.
Inflation is up, the unemployment is high, and the housing market has dropped to almost nothing. The government is trying to keep the economy going by bailing out the banks, giving incentives for first time home buyers, but even though this helps they have raised sales tax, which makes it harder to purchase a home. With the inflation rate as high as it is and the nominal interest rates low, I need to consider the cost of renovations to the old home or purchase the new home. To conclude, inflation, unemployment, and the housing market causes me to keep from spending my hard-earned money now.
In summary all the principles have a role in my decision on purchasing a new or used home. The marginal costs and marginal benefits depend upon the quantity and supply demanded which causes the buyer to look at how much they are willing to pay. The housing market plays a role in whether the current conditions with the market is below the equilibrium rate or above. Even though the tax rates and The Federal Reserve have each lowered their rates in hopes of helping the consumers buy homes in this tough economy, the rate of unemployment and inflation forces one to worry about whether or not the money will be there for the mortgage payments. I have decided because of the expenditures for both homes and the unstableness of the whole economy I will wait on purchasing a home.
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Mankiw, N. G. (2007). Principles of Economics (4th ed.). Mason, OH: South-Western Cengage
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Seiders, D. (2008). National Outlook. Retrieved February 21, 2010, from
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