The product that I have selected to purchase is a new home in the state of California. This product is particularly conducive to a number of economic factors that allow its price to fluctuate based on supply and demand and a number of other crucial aspects. Two economic indicators that reflect the strength of the economy include interest rates and inflation rates. Interest rates are set by the Federal Reserve in the United States and are altered dependent on the state of the American economy and how such factors as housing prices and employment rates along with job rates and market prices are impacting the ability of people to purchase products such as cash, shares and other investments including mutual funds (Menton, 2015). Since the Federal reserve alters interest rates, it needs to pay careful attention towards the status of the economy and be able to judge when it needs a rate cut to convince more people to buy and when they need to increase when the economy is rising. For example, the Federal Reserve recently increased interest rates by 0.25% as a result of an improving economy indicated by decreasing unemployment rates and also an improving stock market that further indicates strengthening private corporations such as banks.
The second economic factor of inflation rates focuses specifically on the cost of retail items including those found in stores as well as that of cars and houses (pertinent to this particular paper). Inflation rates increase when the government or economy wants to gain greater profits from its constituents and is normally in response to a lowering currency value. For example, when the price of the American dollar decreases, the government needs to increase inflation rates to make up for the cost of cheaper goods being imported and exported in and out of the country (Menton, 2015). In regards to house prices, it allows more people to invest in commodities such as houses that have more shorter-term value and prospects with respect to their selling value. For example, increasing inflation rates may convince someone to purchase a house with the expectation that it will continue to increase in value and allow greater capital raising overall.
Over the last two years in particular, the economy has played a major role in defining the supply and demand of houses and their value. Over two years ago, the housing market was recovering from a large crash after the global financial crisis. This was the result of ultra low interest rates, which were convincing more people to take out mortgages at affordable rates and with lower minimum monthly payment schedules. When these interest rates started to increase, people were unable to afford minimum monthly payments as they also increased and this subsequently drove house prices down in an attempt to convince people to start purchasing them again in spite of the recent increase in interest rates (AL, 2014). The price of houses dropped so low that home owners were losing substantial capital through their homes and as a result, were forced into selling in a down market. In the last year or even two years, house prices have recovered and the ultra low interest rates have forced more people to buy and invest in more affordable rates and affordable homes overall. In contrast to the 2008 and 2009 housing market crash, the Federal Reserve has been very hesitant in raising interest rates and the recent 0.25% interest rise was conducted in moderation to preserve the housing market (AL, 2014).
Inflation rates have also continued to rise as the price of the American dollar remains relatively stable and has dropped in the last few months for short periods of time. Inflation rates combined with interest rates have subsequently increased the demand for houses over the last two years in the United States and also allowed for the price of housing to increase slightly resulting in some capital gains on housing and mortgages respectively (Menton, 2015). The supply of houses has responded to this greater demand by being more plentiful with such pressures as increasing house prices forcing certain areas into building more houses and subsequently expanding. This is more noticeable in crowded states and areas such as Los Angeles in California (Engerman, 1986).
The price of the house that I have been researching and extensively interested in has increased slightly as a result of these improvements and eventual recovery in the American economy. The price is still very low as the housing market continues to recover and interest rates are allowing more people to take out mortgages. I decided to invest in this product within the last year as I was hesitant about any potential interest rate rises and what they would do to the American economy and the price of housing. The recent 0.25% interest rate rise has slightly devalued the American currency and house prices have continued to increase despite this. I firmly believe that the price of housing will continue to increase as long as the Federal Reserve keeps interest rates low and the American economy can remain more stable in the long term, in contrast to the 2008 and 2009 Global Financial Crisis (Menton, 2015). Purchasing a house now is a wise decision as its price will inevitably increase within the next 5 years and the American economy should remain relatively stable for the next few years. The area that I am investing in is also expanding and the development of project homes will inspire others to move to the area and look for more affordable living. Since I am purchasing a house for a long-term investment, there is minimal risk in terms of receiving a return on the house as tenants will provide a temporary income that will allow mortgage repayments to be covered. With an increasing house value, interest rates on my mortgage may also lower and this is normally the case with increasing liquid assets in a bank account (AL, 2014).
My knowledge of supply and demand and my recent insights and education about this topic can definitely be applied to my workplace and decision to purchase the house. As stipulated earlier in this paper, I am purchasing a house in an area that has a higher demand and lower supply of housing. This is beneficial in the sense that the price of my house will inevitably increase as more people look into buying property in the area. In the next two years, if this cycle remains the same, then the price of my house should have increased substantially and therefore making more capital for myself. Furthermore, the concepts of macro-economics allow me to have a better understanding of the impacts of changes in such aspects as interest rates and inflation rates (AL, 2014). The most significant requirement is that I understand how changes in these economic rates indicate the status of the current American economy and how this also transcends towards the decision to purchase a significant American asset. In this situation, my choice to purchase a home is dependent on a recovering American economy as indicated by very low interest rates and increasing inflation rates as a result of a relatively unstable American dollar (which allows foreign entities to make greater profits from American products but not vice versa). The impacts of the economy on supply and demand and personal financial decisions are enormous.
- AL. (2014). The American way: 5 factors making the US economy a world leader. Alabama,
Retrieved from http://www.al.com/business/index.ssf/2014/07/the_american_way_5_factors_mak.html
Accessed on 11th April, 2016.
- Engerman, S. (1986). Introduction to “Long-Term Factors in American Economic Growth”.
NBER, Retrieved from http://www.nber.org/chapters/c9676.pdf
Accessed on 11th April, 2016.
- Menton, J. (2015). Economic Growth Slows Sharply in Q1 2015: 5 Factors Slowing US GDP.
International Business Times, Retrieved from http://www.ibtimes.com/economic-growth-slows-sharply-q1-2015-5-factors-slowing-us-gdp-1901257 Accessed on 11th April, 2016.