A New House – Decision

Axia College of University of Phoenix

 A New House - Decision

A home purchase may be for many reason like, first time buying a home, last time buying

home for retirement, or buying a home for the sole purpose of an investment opportunity. No

matter what the reason is behind the purchase of the home, there are some basic economical

principles that should be considered during the process of making this ultimate, life changing

purchase. Through the studies of the ten economic principles entailed in chapter one of

Principles of Economics, 4th edition there at a minimum of 6 principles that commonly relate to

new home purchasing. I will be discussing principles of economics that directly relate to home

purchasing, new home purchasing and the association with marginal benefits versus marginal

costs, and how economic strength itself affects these benefits and costs of purchasing the new

home. While evaluating the economy strength, I will also cover the effect the economy endures

through domestic economy and international trade, along with situations and conditions that

could cause me to be lead to make a different decision.

In order to obtain something we, want we usually end up giving something else up to

obtain it. This is the meat of principle one. When actually thought through these are normal

typical decision that everyone makes daily, the only difference is to what extreme the decision is.

For most people a new home purchase is one of the biggest life decisions made. In the process of

a new home purchase a buyer may make the decision to purchase a nice large home, this creates

the trade of higher payments for the buyer for the home wanted. The decision to purchase this

home may require a trade off of losing some of the extra-curricular things like eating out, going

to the movies, taking a vacation, going to a ball game, etc. Now, if a smaller home with lower

payments was purchased versus the nice large home, some of the extra-curricular things may not
be loss or the ones kept could be combined for example a very nice vacation. Either way one

way or another something is given up to obtain either home.

Principle two, “the cost of something is what you give up to get it. Decision-makers have

to consider both the obvious and implicit costs of their actions” (Principles of economics, 2006).

This principle coincides with the first principle, people face trade-offs. A buyer must keep in

mind the prices of homes which they are looking at to purchase. A great benefit of getting a

home that is lower than the budgeted amount would be having that extra amount money to use

for other purchases, possibly for the home. But, if the price is over and above the set budget, then

the consideration of sacrifices and giving up come into play. The opportunity cost would be all

that is given up to make the purchase of the home.

Homes are a considerable demand. Due to the demand my opportunity cost is renting a

home or purchasing a home. A few opportunity costs would be, buying a new truck, forgoing

vacation, or paying for rent versus using it as a mortgage investment. Comparing marginal

benefits to marginal cost I can clearly conclude that buying a home at this time would not be

beneficial.

Buying a new home would be extreme compared to my current monthly rent payment.

The lowest price on homes in the area I want to stay in is close to $350,000. I would end up

paying a lot more then my current rent payment of $1400. Purchasing a home I would sacrifice

money for rent, and I would not be able to buy the new truck I want. If I continue to pay my

current rent amount, instead of the mortgage, I could take the above rent money for the mortgage

and utilities costs and invest for the future of my children’s education. If I don’t spend the

vacation monies on the down payment of the home, I still spend the time with my family. The
opportunity cost of me purchasing a home is the cost of what I have to sacrifice to purchase the

home. At this time in my life it would not make sense for me to go through with a home

purchase.

The third principle, “Rational people think at the margin. A rational decision-maker takes

action if and only if the margin benefit of the action exceeds the margin cost” (Principles of

economics, 2006.) A rational person will think to be able to achieve their goal when opportunity

presents. This principle presents itself when the deciding factor is made on the potential home

investment to purchase.

In purchasing a home, the marginal benefit would be money spent on mortgage for the

home versus my current monthly rent payment. The upfront payment would be the marginal cost

but over time it would be a marginal benefit. Spending my money on the mortgage would

decrease the mortgage and the equity would increase. The marginal benefit would be the earned

equity.

The fourth principle, “people respond to incentives. Behavior changes when costs or

benefits change” (Principles of economics 2006). An example of this would be the recent

information from my instructor regarding the new home buyer incentive possibly being raised

from $8,000 to $15,000. Incentives are placed out there to catch a person’s eye, to entice a

person, to benefit a person, and to motivate a person to act. In purchasing a home the purchaser

needs to consider the benefits entailed with buying the home. The purchaser needs to look at the

personal benefits along with the family benefits. For example, are there schools close that satisfy

the purpose of education for the children, is it safe low crime rate area, is it close to the work

place, is close to shopping centers, etc. A few other incentives may be a future investment,
expand the family, and nice community with programs to become involved in. Purchasing a

home at this time has numerous negatives versus positives, or incentives. An incentive is the

investment versus paying the rent. Once rent is paid, that money paid has served its purpose.

Purchasing a home, the money paid is invested into the home and hopefully make a profit when

resold in the future. The educational facility my children currently go to is the best around here,

moving would not only cause my children to go to another educational facility but also cause

them to adapt to a new environment and make new friends which can be stressful.

The fifth principle, “trade can make everyone better off. Trade allows each person to

specialize in the activities he or she does best. By trading with other, people can buy a greater

variety of goods” (Principles of economics, 2006). Homes being bought and sold is a trade that

helps the economy and the housing industry stay a-float. The act of transferring services and or

goods from one to the other is the act of trade. The transfer of goods allows people to specialize

in what they do best, which in turn allows for the greatest variety of goods or service (Mankiw,

2007).

The sixth principle of economics, “markets are usually a good way to organize economic

activity. Households and firms that interact in market economies act as if they are guided by an

“invisible hand” that leads the market to allocate resources efficiently. The opposite of this is

economic activity that is organized by a central planner within the government” (Principles of

economics, 2006). In the home purchasing process the purchaser needs to study the economy and

see if the economy is in the market stage of buyers’ or sellers’. When the demands are low and

there is a high amount of homes available for purchase, it is a buyers’ market. When there is a

low amount of available homes for purchase and the demand is high, it is a seller’s market.
 The domestic economy also needs to be looked at by the buyer when considering a

purchase. As the domestic economy thrives upward, the inflation raises which in turn the price

on available homes for purchase raise as well. As the economy expands at a high rate it is

attempted to be slowed down by the government process of reducing money flow, increasing

taxes, and increasing interest rates. Purchasing a home with increased rates may take away from

the marginal benefits of home buying.

The economy at this time is not thriving or expanding, home prices along with interest

rates are low, therefore as the economy sits it is a good time to for home purchasing. As the

economy continues in recession a buyer should consider a fixed interest rate when purchasing.

The current recession of the economy creates lower interest rate then what is available when the

economy is in a normal status.

My current situation with me attending online college course which I will need to pay for,

my current family life of supporting 4 with no other income, the expensive but safe area we are

currently living in, and all the items that we would have to give up to purchase a home in the

expensive area, bring me to the conclusion at this time, it is not a wise decision to purchase a

home. Once my 3 year old begins attending school full time then my wife will return to work

which will bring us additional income to calculate in for home purchasing. Our personal situation

is the deciding factor in this decision not the economic standings. As stated before now is a very

good time to purchase a home, but at this time we have chosen not to. I have taken into account

the effecting principles of economics, marginal benefits and marginal costs, and the strength of

the economy. The cost of a new home is not just the amount that is or was paid for it, it is also

the factor of what someone or families must give up to live in that home. Some things at certain

points in our lives we agree and have no problem giving up, and at other points in our lives we
must wait to make that ultimate decision to ensure it a smooth, stress-free, and life changing

experience.
 References

Mankiw, N.G. (2007). Principles of economics (4th ed.). Mason, OH: South-Western Cengage

Learing.

Opportunity Cost. (1997). Retrieved October 13, 2009, from

http://william-king.www.drexel.edu/top/prin/txt/Neoch/Eco111r.html

Principles of Economics (2006). Retrieved October 15, 2009, from

http://www.slembeck.ch/principles.html

Sellers vs. Buyers Market. (2009). Retrieved October 13, 2009, from Haasken Family Realtors:

Http://haaskenrealty.com/default.aspx?main=global/content/tips/sellersMarket.html