Theme 4: Financing of Housing (and the Fed)

Where to rent or buy? When renting or buying, here are some lifestyle ideas to consider: Location (what characteristics does the neighborhood provide: Shopping, grocery stores, parks, businesses, restaurants, laundry mats, school system…) Location to work/school and the commute How long you plan on staying in the location? How much do you value privacy? Crime?

Renting: Advantages and Disadvantages Advan: Mobility- Month-to-month lease or the ability to give 30 days allows the ability to quickly move when needed. If you own, you will need to sell which can be a lengthy process. Advan: Fixed Cost- Outside of utilities (which are sometimes included), the cost is always the same because there is no maintenance. Advan: Low Initial Fee- Outside of deposit, most apartments don’t require any down payment. Dis: No tax deductions Dis: Aren’t paying towards ownership (not an investment, no equity) Dis: A lease is a legal binding agreement which you accountable to Dis: don’t own, can’t refinish Consider - Renters Insurance : a type of insurance that covers lose of a tenant’s property as a result of damage or theft.

When Renting Consider - Renters Insurance : a type of insurance that covers lose of a tenant’s property as a result of damage or theft. Rental inventory: a detailed list of the current property conditions. o Be sure to walk through the property before you sign your lease and mark down any issues that could cause you to lose your deposit later.

Housing: Advantages and Disadvantages Advan: Building equity : the value of your home subtracted by what you owe. (example- $300,000 home which you have paid off $150,000. After sale, you have $150,000) Advan: Private property. You can refurnish your home as long as it fits within legal limits. Advan: Tax benefits Advan: Stability- Lease can’t just end => move out or increase in rent Dis: Maintenance Dis: Down payment (20% of house) or PMI (Private Mortgage Insurance) which protects lender in case of default (usually.03% to 1.5% depending on Credit Score) Dis: Liquidity issues (can lose value and difficult to make liquid) Dis: Difficult mobility Dis: Municipal restrictions Dis: Property Taxes Dis: Have to own home insurance

Terms: Default and Mortgage Default: failure to fulfill obligation (especially pay on a loan) Mortgage: a loan to purchase real estate Usually are paid in 15 to 30 year intervals. Fixed Rate : a mortgage on which the interest rate does not change during the term of the loan. Adjustable Rate Mortgage (ARM) : a mortgage for which the interest rate changes in response to the movement of interest rates in the economy. Why do interest rates change? The Federal Reserve

Business Fluctuations Business Cycle- alternating periods of growth and decline in economic performance. o What are the two variables being measured?

Business Cycle Expansion: Real GDP increases (does not measure intensity of the growth). o Peak: the highest point of expansion before decline Recession: Real GDP decreases for 6 straight months. GDP: the total value (in dollars) of all the “final” goods and services produced in a country during a single year. Real GDP: GDP after the distortions of prices changes/inflation have been removed

Federal Reserve System Central bank of the United States 12 Reserve Districts (12 banks) run by a Board of Governors (7 members) and a Fed Chairman (Janet Yellen) Functions: o Banking regulations: overseas commercial banks and how they function o Consumer credit: create interest rates and laws that pertain to borrowing money o Act as the government’s bank and bank’s bank o Issues nation’s currency

Monetary Policy Controlling the supply of money and the cost of borrowing. 1.Discount Rate: the interest rate charged by the federal reserve to commercial banks. -If the fed lowers the discount rate, banks will lower their interest rates. -If the fed wants to slow down the economy, it raises the discount rate. Explain. 2.Reserve limit: the minimum banks are required to leave in their vaults required by the Fed. - If the fed raises the reserve limit, it slows down the economy. Explain. 3.Bonds: The government buys and sells bonds at a set interest rate. -The higher the rate, the better investment. If you buy now, you aren’t spending in the economy. -Higher rate => Slows down the economy

Back to Housing: Purchasing Agent : the seller of a home must pay the commission for real estate agents (usually 6% to 8%) split between the buyers and sellers agent. o If purchasing, can’t hurt to have an agent (unless they’re no good at their job) Prequalified : determine how much you can borrow before you look at homes to determine what is feasible. An offer or Earnest Money Offer : is a serious intent to buy often backed by a deposit made (~1%) until the transaction is complete. o Keeps the buyer from backing out if in an agreement, the seller takes the house off of the market. If you back out, you may lose the deposit. o Your offer can be below the selling price. Check houses around the area to determine average costs per sq/ft. The inspection report : An inspector (paid for by the buyer) does a detailed inspection of the house to look for home issues which can often lead to a renegotiation of the price.