HACE 2100 EXAM 2 Study Guide Issue 2 Housing Decisions Mortgage Payment Principal payment monthly payment monthly interest payment Principal payment reduces the loan amount Interest payment interest due on the outstanding loan Property taxes and insurance Property Tax property tax rate X value of the house Property Insurances property insurance rate X value of the house Monthly housing expenses 28 of gross monthly income Including PITI Example if gross income 5 000 month then the maximum PITI month should be less than 1 400 5 000 X 0 28 1 400 Ratio monthly housing expenses monthly gross income What s the desirable ratio Front end ratio Back end ratio Monthly Housing expenses other debt 36 of gross monthly income Including PITI other debt loan credit cards ect Example if gross income 5 000 then max PITI month should be less than 1 800 5 000 X 0 36 1 800 Ratio monthly expenses other debt monthly gross income What s the desirable ratio Ways to save on monthly payments Doubling up on payments in the beginning of paying your loan will reduce the amount of interest you will have to pay over time Factors that determine monthly payments House value Percent that you put down Subjective costs and benefits of owning your home Costs Risk of capital loss from factors outside of the family s control Lack of easy mobility Psychological costs inconvenience frustration of maintenance repair Benefits Allows for a good deal of personal freedom to remodel landscape and No chance of rent rising over time relatively predictability of most of the redecorate suiting your tastes Psychological benefits costs of your housing Subjective costs and benefits of renting your home apartment Costs Someone else may determine mobility Lack of freedom and control over dwelling Lower social status Benefits Very mobile can relocate without incurring real estate selling costs No down payment required Avoids the risk of falling housing prices Many times extensive amenities No or fewer home repair or maintenance responsibilities No grounds keeping responsibilities Objective Benefits of owing your home 1 Equity Build Up Annual Mortgage Payment Annual Interest Paid Annual interest payment annual mortgage payment equity build up Annual mortgage payment monthly mortgage payment X 12 months in the calendar year 2 Tax Savings Interest marginal tax rate X interest paid Property Tax marginal tax rate X property tax payment 3 Appreciation of House appreciation rate X value of the house Objective Costs of Renting a Home 1 Annual Rental Payments Monthly rental payments X 12 2 Annual Renter s Insurance monthly renter s insurance X 12 3 Annual repair costs Monthly repair costs X 12 4 Opportunity cost of security Deposit estimates savings rate X amount of security NOTE when rent goes up the security deposit remains the same deposit In class assignment 3 Issue 3 Fertility Decisions Measures of Fertility know the definitions and how to calculate them Number of live births Crude birth rate General fertility rate The number of births that occur to an individual or in a population The number of births per 1000 population The number of births per 1000 women aged 15 44 child bearing age Trends in Fertility Long term fertility decline 1 Decrease in the economic benefit of having children Decrease in children s productive efforts Kid s don t work on farms anymore Substitution of government for children s role as providers and caretakers of their elderly 2 Increase in the Costs of having and raising children Direct costs have risen Inflation Rising standards of child quality quality over quantity Quantity Quality trade off Term used by Becker Opportunity costs of parents especially mothers have risen 3 Decrease in the costs of avoiding having children Widespread availability of cheap and effective birth control Legalization of abortion Secularization of society and weakening impact of religious views Social acceptance of couples being childless or voluntarily parents childfree Cyclical fluctuations in fertility baby boom Possible Explanations for cyclical fluctuations Price Effect an increase in the price of children will decrease the number demanded people are choosing to have less children Exception the baby boom If wages increase the opportunity cost of having children will increase the price of having children will also increase have less children due to the Price Effect Income Effect a rise in one s income will increase the number of children demanded Exception the late 1960 s early 1970 s If income increases people will have more children due to the Period Effect a change in fertility of women of all age groups in a similar income effect way A change of tastes WWII doesn t count because it was too short of a time frame Cohort Effect a change in fertility of a group born at the same time that results from earlier shared experiences baby boom baby busts Single group changes 3 cohort examples 1930 s 1950 s and 1970 s Percent of women who are childless have been increasing over the last 30 years Fertility rate is tied to the growth rate in the economy National and state level trends Bel jean packet reading Objective costs and benefits of having children Objective Benefits Productive work of children farm work and household production Now less than before Children as social insurance during parents old age Now less than before Tax Exemption Reduces taxes by taxpayer s tax bracket Tax credit Reduces taxes dollar for dollar Tax Benefits of Children Deduction from taxable income Personal exemption 3 700 in 2011 Tax credit Childcare tax credit 1 child 3000 2 children 6000 Child tax credit Up to 1000 per child Tax exemptions and tax credit Transfer income from government for eligible low income families TANF and other in kind subsidies Food stamps housing subsidies Medicaid head start ect Objective Costs Direct Costs Food at home food away from home Transportation Housing Childcare and education Medical care Clothing Costs of college education Opportunity Costs Forgone earning of mother and or father Forgone rate of return on savings and investments These are higher for highly educated people Subjective costs and benefits of having children Subjective Benefits Adult status and social identify Immortality your children will live on your legacy Morality subordination of self interest Emotional security affiliation Feelings of accomplishment and competence Stimulation and novelty Feelings of power and influence Social comparison and competition