First Time Homebuyers

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First Time Homebuyers

• By Jeffrey Blair

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Why People Dont Buy a House

• They dont think they have enough money for a
  down payment
  
• They are not informed of all the programs out
  there to assist them in purchasing their own
  home
  
• Gary V, Engelhardt Consumption, Down Payments,
  and Liquidity Constraints, Journal of Money,
  Credit and Banking, Vol 28 No. 2. May 1996, Pg
  255-271

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Why People want to Buy Houses

• They want to better their lives by moving into a
  nicer neighborhood
  
• Buying a house will help increase net worth
• Buying a house will increase a persons MPB over
  their MPC, the benefits a person receives from
  owning a home will far exceed there cost.
  
• Does buying a home always beat renting, by Liz
  Pulliam Weston, www.msnmoney.com , Jan 22, 2004
  

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Inefficiencies in the Housing Market

• Apartments and rent houses become run down
  because the people who rent dont own them and do
  not want to spend their money to fix them up.
  
• This leads to run down neighborhoods where people
  are living in slums and children are attending
  under-budget schools.
  

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Externality Graph
Msc
P
PS
Pe
EFFICIENCES LOST
P
MsbSubsidy
MPB
Q
Qe
Q
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Externality Graph Analysis

• There are inefficiencies in the housing market
  when the marginal social benefit does not equal
  the marginal private benefit.
  
• When people are renting, and they dont take very
  good care of the property, it becomes very run
  down, which causes the owner to not get much
  private benefit from renting a place that is not
  going to be taken care of.

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Externality Graph Analysis Continued

• When these neighborhoods become run down, it is
  not a benefit to society because no one wants to
  move into these neighborhoods.
  
• These inefficiencies cause a dead weight loss in
  the market,which is the red shaded Triangle

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How The Government Has Helped to fix the
Inefficiencies

• The government has come up with many programs to
  help people to buy their first house.
  
• They have made grants available to assist people
  with the down payment.
  
• The interest paid on your loan can be deducted
  from your taxes

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How The Government Has Helped to fix the
Inefficiencies Continued

• The MCC tax credit (Mortgage Credit Certificate
  Program) gives people up to a 130 per month tax
  credit.
  

www.ruralenterprises.com/mortgage_credit
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Result of the Government Subsidy
P
MSC
A

PS
Pe
P
B
MPB Subsidy
What the government subsidy pays
MPB
Q
Qe
Q
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Explanation of Graph

• The cost of the house is at point A, but the
  price the buyer pay is at point B
  
• The red shaded area is the subsidy paid by the
  government
  
• The subsidy could be in the form of a grant or
  the tax credit program.

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Explanation of Graph Continued

• The government subsidy increases the quantity of
  homes from Pe to P, or if it was a number it
  could be, for example, the change in quantity of
  10 houses to 15.

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Who is Losing when People are Buying New Houses

• The apartment owners are the ones losing when
  people buy new houses.
  
• Apartment owners are also having to compete with
  the housing market, and having to lower their
  rates to make it a lot cheaper for people to rent
  rather then buy a house.

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Who is Losing when People are Buying New Houses
Continued

• If there is not much of a difference in price per
  month from buying and renting, people would
  rather buy a house than rent an apartment.
  
• The apartment owners have taken the form of a
  rent seeking group, which a group whose purpose
  is to change government policy
  
• The rent seekers have taken the form of a special
  interest group and are trying to turn the free
  housing market into a monopoly so they will be
  the ones making money, and not losing money
  because people are buying houses

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Rent Seeking Model

A
Pm
LMC
C
B
Pc
D
Qm
Q
Qc
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Explanation of Rent Seeking Model

• The triangle made by point ABC shows the welfare
  loss from the monopoly.
  
• Point C is where the market is operating
  efficiently
  
• which is where rent seekers do not want to be
  operating at.
  
• The rent seekers want to be operating at point A
  or B which is where a monopoly rent would be
  operating.
  
• Robert D. Tollison, Rent Seeking A Survey,
  Kyklos 35(Fasc 4, 1982) pg 575-602
  

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Conclusion

• By the government offering many ways to help
  people buy their first home, it is helping to get
  rid of many bad neighborhoods or slums
  
• With the government subsidy it brings the cost of
  houses down so that they are more affordable to
  everyone.
  
• This will lead to a greater benefit to society
  because this will allow people to move out of the
  slums, and move themselves into better school
  systems where their kids can get a better
  education.

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• THE END