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Sandra Florence
Econ-2010-Su15
Professor Dennis Wilson
August 4, 2015
Microeconomic Term Paper
The decision to purchase a home is a major life decision. The consequences of a bad decision
can be devastating. You must factor in the marginal cost with the marginal benefits. The most
important factor in determining whether to buy or rent a place to live, is the current state of your
finances and what you anticipate your income stability will be in the future. Then you have to
consider the real estate market and the credit environment. In addition, you have to factor
whether you want the time and cost commitment involved in maintaining a home. I have made
the decision to purchase 4 homes over the course of my life. My economic situation and the
primary driver behind each decision was different each time.
My husband and I rented for the first two years of our marriage. We couldnt shake the
feeling that we were throwing away our money and wanted to invest in something that we could
eventually own. We bought our first home in an environment where interest rates for mortgages
were in the 18% range. This created a situation that was largely prohibitive from a cost
perspective for us. We ran across a home that the contractor had abandoned. The bank was left
holding the construction loan and was motivated to move the property. They offered a 12% fixed

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interest rate, which still sounds outrageous compared to todays lending environment; but at the
time, it was a bargain. The fixed rate was valid for a 4 year term and then would adjust to .5%
over the prime lending rate. There were a handful of things that need to be finished in the home,
most were cosmetic and would require a $4,000 investment. Given a different interest rate
environment, I probably would have chosen to live in a different area and would have chosen a
different home. But affordability was the primary driver of our decision, so the other factors
played a secondary role.
After six years in that home, our family had grown to 5 people and we needed a bigger
place. We decided to upgrade the size of our home and move to a more desirable area. We
designed the home and put it up for bid to 3 contractors. We hired a contractor on a cost plus
basis, which turned out to be a huge mistake. I was using money from my grandparents in place
of obtaining a construction loan from a lending institution. The home had to complete within the
set budget or we wouldnt be able to qualify for the long term mortgage needed to pay my
grandparents back. I required that all the bills for materials came to me for payment. As the bills
came in, I compared them to the bid submission. It became apparent that the contractor had not
performed due diligence when he submitted the proposal. For example: the lumber bid did not
account for trusses. We had not specified any consequence to the contractor in our contract
simply foolish. We ultimately fired the contractor and could not afford to hire another one and
have the home we wanted. We consulted with a general contractor friend that worked for a high
profile home builder in the area. He provided invaluable guidance and access to his subcontractors. Remarkably, we finished the home in 4 months and came within $30 of the budget.
This was accomplished by monitoring the process closely. If we ran into a circumstance where
the cost was more than planned for one area, we adjusted by cutting out something else. I paid

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my grandparents back and obtained a mortgage with a more favorable interest rate than the last
home. In addition, by contracting it ourselves, we had developed sweat equity substantial
enough that we did not need to pay mortgage insurance which also saved us money. This enabled
us to have a larger home in a more desirable area with a lower payment than our previous home.
Although, the lower payment came with 30 years more to pay on the mortgage. Having the
home of our dreams, took on a higher priority than having our home paid off sooner.
The decision to move a 3rd time, was completely driven by commute distance. We lived
in North Ogden and both my husband and I had taken employment in the Salt Lake area. The
commute was 60 minutes on a good day. One snowy, winter day in 1993, it took 3 hours to get
to work. It was this day that we decided to move away from a home and neighborhood we
loved. The primary driver of this decision was work/life balance. Not understanding the
difference in market, we gravitated to the mountain bench with a similar view that we had in
North Ogden. At the time, information was not as readily available as it is today on the internet.
After attending several open houses, we learned that in order to have the size of house we
wanted, we would be sacrificing location. We ultimately found a home that was nearly finished.
The contractor was building it for himself and agreed to sell it to us. We had him finish two
bedrooms and a bathroom in the basement which gave us the space we were looking for.
After 20 years in that home, I found myself single and an empty nester. My company
approached me with a request to move from Utah to Washington. As part of the offer, they
would cover the costs to move. I once again walked away from a home and a neighborhood that
I had grown to love. This time the primary driver was employment.

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The decision to buy my fourth home was largely driven by the market and my
circumstance. My home in UT sold within 12 hours of signing the contract with the realtor. This
placed enormous pressure on me to find a home in Washington. I gave the realtor a list of things
that I wanted and she quickly helped me understand that I would not be getting my wish list in
the price range I specified. In addition, the supply of homes in Washington was pushing the
prices up. It was a sellers-market, not a great time to be purchasing a home. New homes listed
were selling in days not weeks. It was difficult to view homes before they were sold. I would
ultimately pay over asking price, in a bidding war, for the home I purchased. Frankly, I allowed
the need to find a place to live to cloud my judgement. I didnt do a proper cost benefit analysis.
I bought a 26 year old home that had a foul odor and would require a major remodel. Im 50%
done with the remodel, and I have spent far more money than I imagined it would take to get the
home to my standards.
Marginal benefits influence our buying decision, The Council for Economic Education
(CEE) defines marginal benefit as the change in total benefit resulting from an action.
(Education) When purchasing a home, factors like time saved by living closer to work, home and
lot size, desirable area and amenities, are marginal benefits. These are intangible considerations
that play a factor in the derived benefit of a decision. The CEE defines marginal costs as the
change in total cost resulting from an action. (Education) Costs of home ownership encompass
many things including; purchase price, cost of obtaining money to purchase, cost post purchase
such as upgrades or landscaping, etc.
One must always weigh the concept of marginal cost versus marginal benefits. With a
large purchase the numbers are inflated, which makes the decision all the more important. Trying
to weigh marginal benefits and marginal cost, particularly when buying a home is not always

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easy. Ive sited the various reasons behind my home buying decisions and not all of them have a
monetary price. Is it worth moving to a part of town that is further away from work, because
the area is better? How much better? How much further? There will be some added cost, such as
the expense of gas and mileage on ones vehicle, but few can put a dollar amount on safety. Will
the house be bigger, providing one with more room for a growing family? Will mortgage
payments be less than or more than current rent payments? What other incremental costs will
arise as part of the decision to buy a home? Insurance, extended utilities, moving expenses, and
more are all things we can put a dollar amount on. We cannot, however, place a dollar amount on
pride of ownership, perhaps enhanced convenience, more space, and other things that simply
make like better. (Corniuk)
The marginal costs, outside of the initial cost of my current home, have been significant.
Ive spent nearly $100k on flooring, paint, cabinets, appliances, fixtures, landscaping and Im not
finished. These are marginal costs with owning this home that affect the total cost of ownership
over the long term.
Another way to look at the economic principal of marginal cost and benefit when
purchasing a home is a concept of trade-offs. If resources were unlimited, then you dont need to
make a decision on price, location, or other options you would like to have in your home. This
is where trade-offs come into play. There are a couple of applicable principles of economics.
The first is people face trade-offs. (Mankiw) This mean that there is a cost for everything
an opportunity cost. By deciding to place resources into one thing, we cannot dedicate those
same resources to another item. (Corniuk) When we compare and contrast the cost and
benefits of two or more alternatives, we are dealing with the second principle: The cost of
something is what you give up to get it. Cost is not just a matter of dollars and cents; it also

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represents what we must give up in order to get something else. (Corniuk) Right now, Im not
spending money on travel, clothes and other luxuries so I can remodel my home.
In purchasing my homes, there has always been a tradeoff. Ownership versus renting,
affordability versus optimal location or size, long or short commute, speed to purchase etc. When
I bought my last home, I wanted a large lot, I found a home on an acre. I wanted a short
commute in an area known for horrendous commutes I got it. I wanted a new home and I
settled for a used home and spent significantly more than I budgeted. According to Mankiw,
author of Principles of Economics, the third principle is rational people think about the margin.
(Mankiw) The margins on my current home have shrunk considerably since my decision to
purchase. I think my rational self might have been on vacation when I bought this last house.
Works Cited
Corniuk, Cameron. "Buying a New House - An Economic Decision." 2015. Hubpages.
4 August 2015.
Education, Council for Economic. Econedlink. 2015. 5 August 2015.
Mankiw, N G. Principles of economics (4th ed.). Mason, OH: South-Western Cengage
Learning, 2007.