Eco 372 - Product Purchases and the Economy

Product Purchases and the Economy

Jesse S. Ruffin

ECO / 372

October 15, 2015

Professor Jim Lazos

Introduction

        When considering making large financial purchases in today’s economic climate, one has to take into consideration the possible long-term effects on their financial budget and future.  You have to ask yourself; is the purchase is warranted and are you in a financial position to make a significantly large purchase. There are so many factors to consider not just personal obligations, but is it economically sound in today’s market. In this paper, I will identify and define economic indicators such as interest and inflation rates while considering if any of these indicators impact the supply for what I will demand over a two year period. Also, I will attempt to describe the impact on the price of the home and whether making the purchase should or should not occur.  In an attempt to answer how I might apply my understanding product, I am considering purchasing versus the supply and demand. Lastly, I will see if there are any macroeconomic shifts in supply or demand affecting the price of the Home. Thus, leading to the final decision of whether to purchase a new house or not.  

Economic Indicators

With every large purchase, there is cost associated, especially with the purchase of a house. The two economic indicators that play a major role in the final decision to purchase or not are inflation and interest rate. Inflation is regularly characterized as a constant increase in prices of goods and services. “Supply and demand effects prices, even when inflation is high. An excess supply of housing will decrease the prices; thus causing interest rates to jump” (Anari & Kolari, 2002). Purchasing a home is commonly looked a pond as a good asset and a sound investment regarding inflation. “If the demand for houses is high and exceeds the housing supply than it can increase the prices of houses on or coming onto the market” (Baldi, 2014). This is also known as Demand-pull Inflation (an increase in demand). According to Dua (2007) housing prices are considered critical to demand for housing. The prices can service as a motivate buyers to invest in real estate that directly and indirectly affect the inflation rate. The other side of the coin is when there is a decrease in supply there will be an increase in pricing (Cost-push in inflation). The second economic indicator is interest rate. To gain a basic understanding of interest rates and its influence on making a decision whether to buy a home now or hold off; it can assist the consumer in making financially sound decision.  When buying a home usually involves taking out a mortgage (borrowing funds to purchase a house) causing interest on the principle borrowed. “Thus the interest rate (annual percentage rate or APR) is the portion of the loan charged to the buyer” (Dau, 2007).  This how the lender makes a profit for providing the consumer with a service. As interest rates depressed, the more consumers have the ability to take out loans (borrow money). Thus leading to the house hunter more likely to make a purchase, strengthen the economy, and causing the inflation rate to rise. "The opposite holds true for rising interest rates, as interest rates are increased; consumers tend to have less money to spend"” (Baldi, 2014). According to several report over the past few year the housing market has had a boost.  According to Kusisto (2015) the Federal Reserves (Fed) doesn’t have direct control over mortgage rates or any other long-term rates, which fluctuate based on perceptions about the economy and inflation.