A New House ??“ Decision
May 25, 2011
Principles of Economics
Joyce Williams Maxwell
The housing market is always changing and the economy is to blame for this. It is important to understand the ten principles of economics to be able to make a strong decision such as whether or not to purchase a house. There are a few principles that apply more to the process of buying a house. The second principle says that the cost of something is what you give to get it (N. Gregory Mankiw). The third principle says that rational people think at the margin (N. Gregory Mankiw). The fourth principle says that people respond to incentives (N. Gregory Mankiw). The ninth principle says that prices rise when the government prints too much money (N. Gregory Mankiw). Finally, the tenth principle states that society faces a short-run trade-off between inflation and unemployment. Each of the ten principles are important, but I have chosen to use these five to show how they are important in the final decision of buying a house.
It is important to explain why these principles are important and how they relate to this situation. What is meant by the second principle is that you may have to make sacrifices when it comes to the house that you want. The opportunity cost is very important because it pertains to what you will have to give up in order to obtain the house you want. It is important to first look at what you are able to afford and then decide what you are looking for in that price range. Money is not always the only thing that you have to give up to obtain something you want. The opportunity cost can pertain to anything that you have to sacrifice. In order to afford a new house it is important for a person to do everything they can to save up for what they want. This involved the third principle because people that think at the margin use their resources to rationally make the appropriate decisions needed to obtain what they want. This includes looking at the margin cost of buying a new house, which means making sure that making this decision will be profitable to you. If you are able to purchase a house for a good price will you be spending a lot of extra money in gas to get to work and back because the house is not near your employment This means that you are spending more money in the long run because of your decision to buy that particular house. When looking at the marginal benefit of buying a house you will need to think about whether the price is worth the product. You have found a house with everything that you are looking for, but the neighborhood is not to your liking. Now you will have to think about the price that you are willing to pay for a house that you are not completely happy with. Because of these decisions principle four is effective because people react to incentives that change the marginal cost and benefit of a product. Because you were unable to find a house that you are happy with the seller provides you with the option of a lower price. This change in the price is an incentive to help your decision to buy the house.
Principle nine pertains to inflation and how prices of products rise due to decisions that the government makes. In the situation that the government prints too much money the prices of products such as houses will increase in order to stabilize the economy. When this inflation happens the cost of living is higher, but the unemployment rate is lowered because businesses are able to afford more help. This ties into principle ten which means that during the fluctuation of inflation the unemployment rate will fluctuate as well in the opposite direction. These two principles are very important then thinking about purchasing a house because the cost of the house that you are looking for can fluctuate. Principle ten is important because it pertains to the unemployment rate which can affect the amount of money that your household makes. If you or a member of your household becomes unemployed while purchasing a house, or after purchasing a house you may then find yourself being unable to afford the house.
A large factor in the decision to buy a home has to do with the strength of the economy. Recent studies say that the economy has already gained strength from the beginning of the year 2011. There has been an increase in employment, but many companies are still only hiring temporary employees instead of offering permanent positions. Businesses are having more success with raising prices for goods in order to help pay for the products that they need. People have been more willing to pay these higher prices because more people have jobs. People have also started to purchase more things and this is apparent by the amount of goods that are being sold now compared to 2010. When it comes to pay incentives there has not been a lot of success, but businesses are still recovering from the previous recession. In light of the economies slow start to a recovery there has not been much of a difference when it comes to real estate. The economy is still sensitive and people are not ready to be spending a lot of money on large purchases. Due to the recent recession that the economy has experienced it is important for there to be more of a recovery for people to be comfortable with purchasing houses. The best opportunity for buying a house is when the economy is strong and balanced. What this means is that the inflation rate is at a set rate without fluctuation and the unemployment rate is at a decent level without any signs of rising. When the economy is stable the housing market is stable as well. The prices of houses are not too high due to inflation and it is not as scary to buy a home because of unemployment rates. Keeping a close eye on these changes will make a lot of difference in buying and being able to maintain a house. When houses are comfortable purchasing houses the marginal cost will be steady and reasonable. This is also true because of the marginal benefit; if people are willing to buy houses then the housing market will not be so expensive.
The strength of the current economy is also at the mercy of the market. Whether it is the world market, of the domestic market money needs to change hands several times before the value of the dollar is replenished. At this point in time the value of the United States dollar has been depleted and this is because of the amount of debt that the United States has. Because of this debt the government has had to raise taxes in order to pay it off. By increasing taxes the government has slowed economic growth and limited the amount of money available to the domestic market. After this decrease in cash flow there has been a decrease in employment because the domestic market is unable to afford to pay workers. When workers are not making money they are unable to purchase items from the domestic market. Because of all of these situations the international market is affected as well. When domestic market are unable to afford a large amount of supplies that they need from other countries then the international market has less cash flow from the United States. Currently because of this there has been more activity with the European Union and this has created more of a demand for the euro. These situations all have a drastic affect on the housing market as well because it is considered a domestic market.
After looking at the different aspects that are included in buying a house I would chose not to buy a house. The economic standing has a lot to do with this decision, even though the economy is starting to recover from the recession. There are a lot of things that would need to turn around in order for me to consider buying a new house. One of the things that I would be more comfortable with is if the unemployment rate was lower. The reason that this is so important to me is because without knowing whether I am going to still have a stable income in the future it is impossible to know that purchasing a house would be worth it. Along with the unemployment rate, inflation is important because in order to be in the market for a new house you must be able to afford it. The national debt is something that I keep my eye on because if there is an increase in the government debt then there is a further increase in tax prices that affect everyone in the economy. The economy has to make a much more drastic recovery from the recession and real estate must recover as well. This will affect the marginal cost as well as the marginal benefit for me to buy a new home. Another problem is the debt of the United States because until this debt is taken care of the tax increase will continue and this means that the economy will not be able to fully recover even if it is slowly beginning to recover. These are all things that affect my decision to buy a new house and if these conditions were different I would be likely to purchase a house.
When it comes to making a dramatic purchase such as buying a new house there is more to worry about than what is inside the house and where it is located. It is important to be able to look into the future and predict economic changes. By understanding the ways that the economy affects the housing market it is easier to predict whether your decision is going to be a good one or not. Currently the economy is recovering from a recession that has drastically affected the economy. Even though the United States is working on a recovery it is still moving very slowly. That is why I do not suggest buying a house in the current economy. If someone wanted to go ahead and purchase a house then they would need to have a substantial amount of money as a cushion in case of future situations created by the weak economy. Even if a person did have a substantial cushion I don??™t think that the benefits of buying a house would be worth it.
Mankiw, Gregory N., Principles of Economics, (4th ed.), Cengage Learning, Retrieved May 25, 2011 from chapter 1, p. 3-14
Amadeo, Kimberly, Value of the US Dollar- What Is the Value of the US Dollar- Worth of American Dollar., About.com, Retrieved May 25, 2011 from http://useconomy.about.com/od/tradepolicy/p/Dollar_Value.htm
Reuters, Thomas, posted March 2, 2011, Economy Gained Strength As 2011 Began: Fed. Retrieved May 25, 2011 from http://www.huffingtonpost.com/2011/03/02/economy-gained-strength-a_n_830464.html