A New House Desicion - Essay Example

? A New House Decision A New House Decision Concepts Various economic principles need to be considered while an individual makes a decision of purchasing a new house for himself. These principles include the principle of opportunity cost where consumers have several options available while deciding upon which house to buy (Hall, 2013, p.44). Scarcity of resources have increased the issues that individuals experience while purchasing a home, if resources would not have been scarce, individuals would not have experienced the decision making issue. When an individual is involved in making a major decision, he/she has to forgo another good or service to enjoy the benefits of certain goods and services. For example: in the case of purchasing a new house, an individual might have to give up the benefit of a vacation trip to Switzerland. When an individual is deciding about purchasing a house, he does not only forgo the benefits of purchasing another good or services, he/she even forgo the cost attached to purchasing a good or service over the cost of good and service he/she has planned to purchase. This is called the cost benefit analysis that an individual has to conduct in order to make a purchase decision. While conducting cost benefit analysis, an individual compares the cost and benefits of purchasing a particular good or service in comparison to the costs and benefits associated with the forgone goods and services (Stretton, 1999, p.206) In the real world individuals are not presented with a situation where they have to choose either one side of the paradigm. For example while purchasing a house, an individual might have an option of purchasing the one located in a low cost area and might have another option where the house is located just on the street. Individuals use the concept of marginal changes or in other words alterations that are incremental and meager in nature as stated by the economists. For example: an individual might be under the process of deciding whether to buy a new home or to obtain a home on rent, the decision of whether going for the purchase or rent depends on the marginal costs and benefits that are attached with the decision. Another economic concept that comes into play, while an individual makes the decision of purchasing a new house is the concept of incentives. People make decision after conducting a cost and benefit analysis for various decisions and they might change their decision over time with changes in the costs and benefits associated with a decision. For example: if an individual obtains an apartment or a home on rent, he might go for purchase of a new home if the cost of renting the house exceeds the benefits of obtaining a house on rental conditions. Due to increase in rents, demand for ownership f houses will elevate, which will increase the demand of new houses and the supply of new houses will increase. Marginal Costs Several marginal costs and benefits are associated with an individual’s decision of purchasing a new home. These costs and benefits need to weigh properly in order to reach a decision that is backed by utmost rationality. The first marginal cost that an individual has to experience is amortization while making the decision to purchase a new home (Arnold, 2010, p.505). If an individual is currently living in a home that he had obtained on rental basis and in order to purchase a new home requires certain portion of the amount of money the individual is paying as rent for repayments, the different between these amounts is recognized as a marginal cost. This case is mostly experienced by individual as purchase of house is much expensive than obtaining a house on rental basis (Grant, 2000, p.29). Other than the amount of money paid as amortization, individuals even need to take into consideration, the payment of insurance bills that are associated with the purchase of a new home. Another form of marginal cost that an individual might have to pay is the amount of time that an individual spends in traveling from school or work to his or her home and vice-versa. Other than the time spent, costs such as cost of fuel, maintenance of vehicle, the opportunity cost of forgoing sleep in order to wake up quite early and reaching office on time are all marginal costs associated with the purchase decision. While purchasing a new place to live an individual even has to take into consideration the cost of maintenance of the new house. If the previous setting in which the individual was living did not needed high amount of maintenance and if the new place needs high amount of maintenance, maintenance cost will become an additional cost that an individual will have to pay. Maintenance cost may include: hiring security officials, maintenance of backyard, maintenance of house paint, and cost of hiring people to maintain the lawn. With increase in cost of maintenance, the increase in the amount of time spend to maintain will even takes place which will be another additional cost that a new home buyer will have to face. If an individual obtains a house on rental basis he will have to abide by the rules and regulations of the property owner and this conformity may lead to increase in costs. Marginal Benefits Several marginal benefits are associated with the purchase of a new house, these benefits may include tax shields (Gwartney, 2011, p.11). The government is continuously trying hard to stimulate people to purchase homes instead of obtaining residence on rental basis because purchase of home leads to economic growth. To stimulate individuals to purchase homes, government provides benefits such as tax cuts and tax shields which enable individuals to save tax money. Another benefit may be better credit ratings which in turn assist an individual in securing huge amount of loans in future. This amount of loan can be used by individuals when they are in dire need for money for example: investments and hospice bills. When an individual purchases a home he obtains the benefits of security which can not be achieved if an individual obtains a home on rental basis. Personal home results in several favorable conditions such as reduced stress of complying with the demands of the home owner who provides home on rental basis, secondly, family even gains the security of living under their own shelter and living without the fear of being kicked out. Economic Strengths Impacting Marginal Cost and Benefits Several economic tools and indicators are available that impact an individuals decision of purchasing a new house. An individual should conduct rational decision making process while deciding about whether to purchase a new house and while making a rationale decision, he has to take into consideration all the costs and benefits associated with this decision. While deciding upon whether to purchase a new home, an individual has to take into account the current and the expected conditions of the economy. When the economy is experiencing growth, the interest rates applied to loans for housing purposes are quite high as the demand for these loans are even on the higher side, due to this increase in demand, the cost of purchasing a new home even elevates. Due to higher rates of interest and higher cost of purchasing a new home, an individual might have to delay his decision of purchasing a new place to live. This is the case when obtaining a home on rental basis is inexpensive as compared to purchasing a new home and an individual might prefer obtaining a home on rental basis over the decision to purchase a personal home. The situation might be different if an individual is having a high paying job and is able to pay the higher rates of interest and the high cost of purchasing a house. During good economic conditions, the employment rate is quite high as there are more and more jobs available and to fill these positions, employers are ready to pay higher amount of wages. On the other hand if economic conditions are week and the economy is suffering from recession, an individual might face difficulties in finding a high paying job and may not be able to afford higher rates of interest and might not be able to pay for the high cost of buying a new house, in such conditions, an individual might seek to obtain a house on rental basis. Under week economic conditions, demand for new houses decline and the supply for houses increases, this leads to a decrease in the cost of purchasing a new house and this seems to be a favorable opportunity to purchase a home for those who are on a fixed salary. Domestic and International Economy Impact The local economy is a portion of the huge network that adds up to form the international economy. The condition of local economy is a reflection of the strength of the international economy. Demand for new houses in the local economy becomes weak when the local economy is not operating successfully, when economy is in a recession, job losses takes place which decreases the spending patterns of the individuals living in that economy. The demand of new houses may be low in a particular local economy but the fall in price caused due to lack of local demand may increase the demand for the new houses from international arena. If economy of one particular nation is not doing well and on the other hand the economy of the of another nation is performing well, the people living in that economy might see that investing in new houses in weaker economies is favorable and demand houses in weak economies. Increase of demand for houses in weak economies from foreign individuals give rise to the jobs that are required to build new houses in order to meet demand and these results in an increase in employment. The reality is that domestic economies and international economies may suffer together. This happens because due to bad conditions of local economy and higher unemployment rate, demand for international goods and services decrease which negatively impact the international economies. Alternative Measures There can be various reasons due to which an individual might opt to not to buy a new house. One of the major reasons is that the cost of buying a new house is higher than the cost of obtaining a house on rental basis. Another reason may be instability in the rate of interest, higher interest rates may defer individuals from purchasing new homes and even if an individual purchases at a certain rate of interest, he might opt out if he suspects that interest rates will increase. References Arnold, R. A. (2010). Microeconomics. Australia: South-Western, Cengage Learning. Grant, S., & Vidler, C. (2000). Economics in context. Oxford: Heinemann. Gwartney, J. D. (2011). Macroeconomics: Private and public choice. Australia: South-Western Cengage Learning. Hall, R. E., & Lieberman, M. (2013). Economics: Principles & applications. Australia: South-Western Cengage Learning. Stretton, H. (1999). Economics: A new introduction. London: Pluto Press. Read More