Purchasing a home is unequivocally one of the hardest decisions someone will make. A home loan is a long term commitment and it is the best interest of the person to make sure this is the home they want. Location, size, style and price are all factors that should affect your decision whether to purchase a certain home or not. However, what factors will determine when the right time is to purchase a home and what indicators are there to tell you that financially this a sound decision? These are a lot of factors that must be researched before purchasing a home to ensure that the correct decision is made. This paper will discuss the factors that should be taken into consideration when purchasing a home to help avoid financial devastation. When deciding to purchase a home one principle of economics to consider is “the cost of something is what you give up to get it” (Mankiw, 2007). This is particularly true when purchasing a home. It all depends on how much money you are willing to give up in order to purchase the home that you desire. There are cost and labor associated with owning a home so you must first weigh what you will be giving up with what you will be getting. Is the trade equal? Are you giving up more than you are getting? These questions will help you to see if you are giving up too much in exchange for a much smaller return. For instance, you desire a home in Hollywood, CA. The cost of the home is 1.3 million dollars. You are in a gated community so you must pay HOA fees and the home is much smaller then you originally desired. You must ask yourself if you are giving up too much money in exchange for a home that is close to what you desire but not exactly what you envisioned. However, we all know that people respond to incentives (Mankiw, 2007). Meaning, you have to look at what you are gaining when purchasing a home. Incentives don’t have to be large to attract buyers. Incentives such a washer and dryer included with new developments tend to attract more buyers than homes without this same offer. When real estate agents are offering to pay closing fees, this is an incentive that buyers desire to see. Asking oneself what goals are being given up in order to make this purchase is another question to be considered. If there is another goal that will not be met the purchase may not be viable. For example if a person wants or needs a new car, it may no longer be an option to buy one if a home is purchased. There are several principles of economics that must be considered when making a large purchase. So what are the costs and benefits related to purchasing a home? Do the benefits outweigh the costs? In order to answer this question, we have to look at the marginal benefits and the marginal cost. Let’s first look at marginal cost. The Council for Economic Education defines marginal costs as "the change in total cost resulting from an action and marginal benefit as "the change in total benefit resulting from an action" (CEE, 2009) To figure out the marginal cost or the marginal benefits, you must look at two things, the cost and the maximum amount you are willing to pay. When purchasing a home, there are several marginal costs that you must look at and in the process figure out if the marginal benefits outweigh them. Landscaping can be a deal breaker from some buyers. Buying a home with a beautiful lawn and useable backyard is definitely a marginal benefit. It’s a small part of buying a home but creates a sense of satisfaction with the home buyer. However, let’s say the lawn is in dire need of care. If the cost of landscaping is found to be $2000, you have to ask if you are willing to pay the extra $2000. Does the benefit of having a lawn compensate the cost of landscaping? One marginal benefit that a homeowner will look at is the local school district. Many people are looking to move to a neighborhood that has a better school district and are willing to pay a higher price to achieve this. The benefit of sending kids...
References: Amadeo, K. (2012, September 4). How the 9/11 Attacks Still Affect the Economy Today. Retrieved March 7, 2013, from http://useconomy.about.com/od/Financial-Crisis/f/911-Attacks-Economic-Impact.htm
Mankiw, N. G. (2007). Principles of economics (4th ed.). Mason, OH: South-Western Cengage Learning.
Siegfried, J., Krueger, A., Collins, S., Frank, R., MacDonald, R., McGoldrick, K., & Taylor, J. (2010). Voluntary National Content Standards in Economics (2nd ed., p. 6). New York, NY: US Dept. of Education. Retrieved March 7, 2013, from http://www.councilforeconed.org/wp/wp-content/uploads/2012/03/voluntary-national-content-standards-2010.pdf
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