George C Wallace its a Big Purchase so Why Not Invest Some Time in Basic Financial Analysis Article Discussion Please read the attached document, and then

George C Wallace its a Big Purchase so Why Not Invest Some Time in Basic Financial Analysis Article Discussion Please read the attached document, and then answer five questions at the end of the article. It’s a big purchase, so why not invest some time in basic
financial analysis
By Neil Irwin
Ben S. Bernanke refinanced; how about you?
The Federal Reserve chairman, who bought a rowhouse on
Capitol Hill in 2004 using an adjustable-rate mortgage, saw his
payments surge in 2009. He refinanced late last year into a 30year fixed-rate mortgage, for “a little over 5 percent,” as he told
Time magazine.
It’s a reminder that even the leading thinkers in economics and
economic policy have to make the same kinds of routine decisions
about buying and financing a house that the rest of us do. And
there is a lot that all of us can learn from economic analysis in a
search for a place to call home.
The decision to buy a house is an inherently risky decision. A
house is an illiquid investment, time-consuming and expensive to
sell. It’s expensive, usually several times the buyer’s annual
income. It relies on leverage (borrowed money) and is
significantly affected by tax policy through the mortgage interest
deduction.
Although it may not be practical to pick up an advanced degree
just to decide whether to make an offer on a three-bedroom
bungalow, there are some relatively simple concepts about
economics, economic policy and finance that should factor into
your thinking about home buying. I cover the U.S. economy and
the Federal Reserve for The Washington Post, and here are some
analytical tools I relied upon while weighing my purchase of a
Logan Circle condominium in 2008. None of these can determine
whether buying is the right decision for you — but each can make
you a more informed shopper.
Inflation is your friend
When prices rise across the economy, it is commonly thought of
as a bad thing. But for a new home buyer with a mortgage, it can
be a boon, particularly if that mortgage has a fixed interest rate.
In the long run, home prices rise only a bit faster than inflation;
the steep price rises of the late 1990s and first half of the past
decade were an aberration, not the norm. This means that the
rate of inflation plays a major role in determining the value of
your home when you go to sell, even as the amount you owe on
the mortgage is fixed. And the return is magnified by the use of
leverage, or borrowed money, which also magnifies your loss if
the value of the home declines.
For example, for a family that buys a $400,000 house with
$100,000 down and a 5 percent, 30-year fixed-rate mortgage for
the remaining $300,000. Let’s assume that the home’s value
rises one percentage point above the inflation rate each year,
which is about the long-term historical average.
If the family sells the house 10 years from now, it still owes about
$260,000 on the mortgage, regardless of how high inflation has
been. But if annual inflation was 5 percent during that span, the
house’s resale value has risen so much that the family’s profit,
after paying off the mortgage, would be $273,000, compared
with $205,000 in profit if inflation had been 1 percent. (Both
values are stated in current-year dollars, adjusting for inflation).
Lesson: If you expect inflation to be high in the coming years,
buying a house is a more attractive proposition.
That’s bad news, actually. Economists are now expecting many
years of very low inflation. And some analysts worry that inflation
could fall even further, perhaps into negative territory — a
dangerous, self-reinforcing cycle called deflation. That would be a
very bad situation for homeowners, making debt more onerous
and putting downward pressure on the value of the homes.
Alternate lesson: If you believe that large budget deficits and
easy-money policies from the Federal Reserve will lead to
astronomical inflation, then buying the biggest house you can
afford becomes a financial no-brainer. Just keep in mind that this
scenario is not what most mainstream forecasters — or the bond
investors who have money on the line — expect.
Q1. What factors should you consider before buying
a house?
Q2. What impact does owning a house have on your
taxes?
Q3. What are the risks in owning a house?
Q4. When does buying a house make sense that
can help you increase your net wealth?
Q5. What impact does inflation have on owning a
house?

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