Checkpoint: New House-Economy Essay

339 WordsJul 23, 20122 Pages
Vernon Johnson Checkpoint: New House-Economy Principles of Economics 07/13/2012 The strength of the economy plays a factor in home purchases in various ways. When the prices for homes increase, consumers have less purchasing power. In this case, consumers may substitute a cheaper option in place of the more expensive option. Demand for the more expensive homes decreases and demand for the cheaper option increases. The cheaper option in some cases would be to rent. When the economy is down, people stop buying, when sales go down, real-estate prices go down to compensate the sales drop so they can sell the house.1 Many middle-class homeowners count on deduction as a way to save or a way to make ends meet, and the powerful real estate industry also depends on the mortgage interest tax. Messing with the deduction would hurt the fragile housing market and decrease home values by as much as 15 percent, including homes of homeowners who own their homes outright with no mortgage. Any downward pressure on home prices will hamper the economic recovery, increase foreclosures and hurt banks’ abilities to lend and possibly push us into another recession. 2 The federal government can affect home purchases with taxes and spending in other ways. The federal government can place pressure on banks to keep interest rates at a reasonable level, thereby controlling the price of housing. Increases in interest rates make houses more expensive since the loan money is more expensive. To some extent, the policy of bailing out banks with taxpayer funds is a means of keeping the banks from charging customers more on mortgages, keeping them solvent and able to continue providing loans to new home buyers.3 1. The Effects of Purchasing Power. (2012). Retrieved from http://www.ehow.com/list_7242892_effects-purchasing-power.html 2. Government Policies That Affect Housing Prices.

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