Buying Decision - a New House Essay Example | Topics and Well Written Essays - 1750 words

Buying Decision - a New House - Essay Example Key words: House, Economy, Domestic Economy, GDP - Gross Domestic Product, BEA - The Bureau of Economic Analysis, purchasing power, inflation, international trade. John & Tia are living in a rented studio apartment at a location near to their offices and commercial area which is ideal for them. However, they are expecting a baby and require bigger space to have room for baby’s nursery and a location that is near to clinic / hospital, school, nurseries, day care centers and other social service offices they might need to consult after they have the baby along with continuation of their respective careers. Both to-be-parents are confused whether to rent a bigger place or make the ultimate investment of buying their own house in an economy that is gradually improving from recession. This is a major investment for the couple that requires a substantial financial expenditure which is going to alter their financial position, spending habits, saving percentage etc. Consequences of th is substantial investment would firstly require savings and other investments evaluation. They have been saving for few years and have sufficient amount to make the down payment and pay mortgage for at least a year. Hence they are prepared financially however, they need to be emotionally willing to take the huge plunge into this big investment as well as cope with resulting restrictions, requirements and tradeoffs involved. They need to assess whether their current income flow is sustainable and can support mortgage payments for the future period. If mother-to-be has to quit job in order to take care of the baby would they be able to afford making payments regularly and how will they manage their financials? They also need to evaluate if it is the right time to take the leap or they should stick to rented option. Their detailed assessment of the economic situation, evaluation based on economic factors and weighing down of options is given below. Majority of the decisions we make as consumers are directly related to or influenced by the prevailing economic conditions. Our future plans are shaped in accordance with our expectation of how the economy will perform. We shall refer to a few of N. Gregory Mankiw’s principles related to the principle of making the purchase decision and influencing factors. According to Mankiw, there is no â€Å"free lunch† we must give up something in order to get something i.e. every decision has its costs / tradeoff. In our case tradeoffs are the plans couple had already made earlier that they now need to forego or put on hold, such as yearly vacation and a new car. They would also have fewer saving hence restricted spending priorities since now they also have to consider extra savings for future expenses related to raising a child as well as maintain the new house if the go ahead with the decision. Further tradeoffs would be loss of interest income being earned on the savings and opportunity cost lost on account of no t having the same amount invested to gain profit. This factor would evolve into the second principle by Mankiw which involves considering and weighing the costs of decisions, i.e. opportunity cost which is ever present. The couple would be losing on the opportunity to have the amount saved and interest being earned giving them financial strength instead of having it spent on down payment, monthly mortgage payment and insurance payments. Other