New House Decision - Essay Example

?New House Decision Introduction Economics is everywhere. People deal with it everyday, just by choosing to ride a bus or to take a walk is an application of economics. When planning to take the bus, one should take into consideration the available money, and the possibility of traffic jam. Also, when deciding to walk, available free time must be considered since walking consumes more time. There are actually a lot of things that require knowledge on basic economics. One of which is the decision of buying a house. One has to take into account several pros and cons in order to come up with a better decision. This paper will assess the consequences brought about by economics on every major decision we made. Furthermore, this will show the important things to be considered in buying a house with a purpose of helping anyone who is in the quest of deciding to purchase one. Economic Principles The first thing to be accounted for is the opportunity cost. McConnell & Brue (2005) defined opportunity cost simply as the value of the forgone opportunity to obtain something else when coming up to a decision. Opportunity costs include the possible gains from investing the same amount of money in a business or stock market instead of using it to pay for the down payment (Derrick, 2009). To obtain a house would mean foregoing the chance of earning interest from a possible investment using the same money. It would also mean foregoing the opportunity of going to a postgraduate program or a doctorate one. There were actually several things one forgoes in deciding to buy a new house. Another thing to consider is the tradeoffs, from which opportunity cost arises. According to McConnell & Brue (2005), trade off is when you give up one thing to attain more of something else. It is more likely the same with the opportunity cost. The difference is that trade off is the decision itself while opportunity cost concerns the value of the thing given up. In decision making, most of the time, one has to choose an option rationally. In the case, one either has to choose between buying a house or not. If one will opt to purchase a house, his ability to buy another good declines. For example, if one chooses to get the house located near to his or her office, a part of the savings will be lost which could intently be used in buying clothes. So, she will buy fewer clothes, or worse, she will not buy anymore since the same amount of money was used to get the house. Another example would be the same amount used to buy a house could be spent in sending a child to a prestigious school. To others, purchasing a house would mean sacrificing the education of their children. To arrive at a decision, one has to consider the benefits over the costs. Since buying a house is a life-changing decision, one must think of it carefully. Purchasing a house offers the soon-to-be homeowner long-term financial-related benefits like tax savings. Some people even agreed that it’s the best investment to make. Quealy & Tse (2010) said that “property taxes, the interest part of the mortgage payment, and in some cases, a portion of the common charges, are tax deductible.” Basically, homeowners can deduct mortgage interest, points or the charges by the mortgage lender, equity loan interest of up to $100, 000, home improvement loan interest, mortgage tax credit, and real estate tax or often called as property taxes. Mortgage interest deduction can be the largest among all other deductibles since one can deduct up to $1 million. When one takes a loan for major house improvement, he or she can deduct the interest payment without any limit, provided that the said improvement adds value to the house. To sum it all, it will be a huge tax savings. However, these tax deductibles can only be claimed if deductions are itemized rather than standard deduction. Another incentive a homeowner can get is that the values of real estates, over the years, have appreciated. Along with this is the fact that the value of the house appreciates. The costs to be incurred in purchasing, improving, and maintaining the house can be very huge, but the benefits and incentives can outweigh the costs in the long run. Buying a house is an investment for the future; so, one should take a look at the long term fulfillment rather than just concentrating on the short run results. In purchasing decision, marginal analysis is very important; that is comparing the marginal benefits over its relative marginal costs. In every decision, one should evaluate the benefits if it exceeds the additional cost. Just in the case presented, one is deciding to purchase a two-bedroom unit, three-bedroom unit, a two-storey or a three-story unit. The marginal cost of the bigger house is the additional expense beyond the cost of the smaller house. The marginal benefit is the larger space lifetime comfort and convenience. If the benefit outweighs the cost, it is always a wise decision to buy a house instead of just renting. On the other hand, if cost is larger than the benefit, to rent is a better decision. Effects of Economic Strength to Marginal Analysis Economic state of the country affects the decision of buying a house or not. When there is recession, people save more and spend less. Majority of people put their money in the bank because of the increasing interest rates, from which they can earn. Also during this time, businesses tend to lessen their cost and production, thus, decreasing their labor force. Since demand is greater than the supply, prices of commodities tend to increase. Instead of buying a house, one can use the money to buy other things necessary like foods and clothes. Here, the marginal cost is greater than the marginal benefits. On the other hand, during economic growth, company experience rising profits, investments, and productivity. Consequently, there will be an increasing employment and wages which leads to an increase in the standards of living, as well. When the standard of living increases, anyone can now afford to buy the things they can not afford before, like for instance a car or a house. During this period, people would most likely to purchase a house since they can already afford to pay the mortgage with the interest. In fact, marginal benefits now exceed the cost because people now have more savings, and their ability to buy other things increase. Domestic and International Trade When state of the economy should be considered, one has to evaluate its strength through studying the domestic and international market. The state of domestic economy can be measured through its GDP or Gross Domestic Product. GDP is composed of “personal consumption, business investment, government spending and net exports of good and services” (Amadeo, n.d.). She added that consumer spending makes up the largest portion of the American economy due to its huge population and geographic location (Amadeo, n.d.). So when consumers increase their consumption, it has actually good effect to the economy. Business investment refers to what the companies buy for their production of final goods. Government purchases are “expenditures by government for goods and services that government consumes in providing public or social capital that is long lifetime; the expenditures of all governments in the economy for those final goods and services” (McConnell & Brue, 2005). Net export is basically the difference between the exports and imports of goods and services. Increase in any of the above-mentioned components drives the GDP to increase. All countries want to increase their GDP. To do so, they all want to have more exports than their imports. This is when international trade comes in. When a nation is exporting, another country is importing the same goods. This means to say that not all nations can have positive net exports. All these transactions between countries over a period are recorded in the “balance of international payments” (Gorman, 2003). Exports, let us say, of US to Japan would be a credit to the US and credit to Japan. Adjustment would be made when payment is made by Japan. Any increase in the balance of payment affects the GDP since most of the transactions recorded are exports by one nation to the other. This, of course, entails a stronger economy; thus, there is an economic growth. Domino effect then happens to the individual consumers, meaning, people would tend to increase their ability to buy as a result of increasing wage rates. Situations/Conditions that would Lead to Different Decision Purchasing the house could be, all the time, the best decision to make especially when things are not really going on smoothly. Possible reasons of not buying the house would be that after evaluating the costs and benefits, one finds it logical to simply rent to avoid the hassle of maintenance of the house. More so, if one does not intend to stay in one place for a longer period of time when the work requires him or her to transfer from one place to another, it is always conventional to just rent. Another reason is probable downsizing of the business which would lead to the cutting off of their expenses, including labor costs. This would result to a deduction of income, and anyone would opt to buy more important things than attaining a dream house. To some, they can wait to have a house of their own, but they can not sacrifice a better education of their children. They have to send their kids to a good university or college as an investment to their own future, before taking into consideration the purchase. There are indeed so many reasons why one would not want to purchase a new house; however, there are also more reasons of buying one. Conclusion Every decision is risk-associated. There are always ‘what ifs’ to all decisions made. Purchasing a house is a very crucial matter to decide it on the spot without carefully evaluating its advantages and disadvantages. Buying one signifies a long-term commitment to pay the monthly mortgage with its interest. It would mean a deduction of income and sacrificing other things that are accustomed to be done. Most of the mortgage plans cover a thirty-year period or more and interest rates are viable to some economic factors. That would be a very long tiring wait just to complete the payment. Moreover, owning a house requires high maintenance cost and utility bills. But the long-term fulfillment and comfort of providing your family a house you can call it your own can make all the sacrifices worthwhile. References Amadeo, K. (n.d.). What are the components of GDP? About.com. Retrieved from http://useconomy.about.com/od/grossdomesticproduct/f/GDP_Components.htm Derrick, J. (2009, June 8). Understanding Opportunity Cost. SavingAdvice.com. Retrieved from http://www.savingadvice.com/articles/2009/06/08/104674_understanding- opportunity-cost.html Gorman, T. (2003). The complete idiot’s guide to Economics. New York: Alpha Books. McConnel, C. R., & Brue, S. L. (2005). Economics: Principles, problems, and policies (16th ed.). New York, NY: McGraw-Hill higher Education. Quealy, K., & Tse, A. (2010, April 21). Is it better to buy or rent? The New York Times. Retrieved from http://www.nytimes.com/interactive/business/buy-rent-calculator.html Read More