HACE 2100 EXAM 2 Study GuideIssue #2: Housing DecisionsMortgage Payment Principal payment = monthly payment – monthly interest paymentPrincipal payment  reduces the loan amountInterest payment  interest due on the outstanding loanProperty taxes and insuranceProperty Tax = property tax rate X value of the houseProperty Insurances = property insurance rate X value of the houseFront-end ratioMonthly housing expenses > 28% of gross monthly income Including PITIExample: if gross income = $5,000/month then the maximum PITI/month should be less than $1,400 5,000 X 0.28 = 1,400Ratio  monthly housing expenses / monthly gross incomeWhat’s the desirable ratio?Back-end ratio Monthly Housing expenses + other debt < 36% of gross monthly incomeIncluding 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 = 1,800Ratio  monthly expenses + other debt / monthly gross incomeWhat’s the desirable ratio?Ways to save on monthly paymentsDoubling up on payments in the beginning of paying your loan, will reduce the amount of interest you will have to pay over timeFactors that determine monthly paymentsHouse valuePercent that you put downSubjective costs and benefits of owning your homeCosts Risk of capital loss from factors outside of the family’s control Lack of easy mobilityPsychological costs - (inconvenience, frustration) of maintenance / repairBenefits Allows for a good deal of personal freedom to remodel, landscape, and redecorate suiting your tastes No chance of rent rising over time (relatively) predictability of most of the costs of your housing) Psychological benefitsSubjective costs and benefits of renting your home/apartment Costs Someone else may determine mobility Lack of freedom and control over dwelling Lower social statusBenefits 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 home1) Equity Build-Up = Annual Mortgage Payment – Annual Interest PaidAnnual interest payment = annual mortgage payment – equity build upAnnual mortgage payment = monthly mortgage payment X 12(months in the calendar year)2) Tax Savings:Interest = marginal tax rate X interest paidProperty Tax = marginal tax rate X property tax payment3) Appreciation of House = appreciation rate X value of the house Objective Costs of Renting a Home1) Annual Rental Payments = Monthly rental payments X 122) Annual Renter’s Insurance = monthly renter’s insurance X 123) Annual repair costs = Monthly repair costs X 124) Opportunity cost of security Deposit = estimates savings rate X amount of security depositNOTE: when rent goes up the security deposit remains the sameIn-class assignment #3Issue #3: Fertility DecisionsMeasures of Fertility (know the definitions and how to calculate them)Number of live birthsThe number of births that occur to an individual or in a populationCrude birth rateThe number of births per 1000 populationGeneral fertility rateThe number of births per 1000 women aged 15-44 (child-bearing age)Trends in FertilityLong-term fertility decline1) Decrease in the economic benefit of having childrenDecrease in children’s productive efforts Kid’s don’t work on farms anymoreSubstitution of government for children’s role as providers and caretakers of their elderly parents 2) Increase in the Costs of having and raising childrenDirect costs have risenInflationRising standards of “child quality” (quality over quantity) Quantity-Quality trade off Term used by Becker Opportunity costs of parents (especially mothers) have risen3) Decrease in the costs of avoiding having childrenWidespread availability of cheap and effective birth controlLegalization of abortionSecularization of society and weakening impact of religious viewsSocial acceptance of couples being “childless” or “voluntarily childfree” Cyclical fluctuations in fertility – baby boomPossible Explanations for cyclical fluctuationsPrice Effect: an increase in the price of children will decrease the number demanded (people are choosing to have less children) Exception: the baby boomIf 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 EffectIncome Effect: a rise in one’s income will increase the number of children demandedException: the late 1960’s / early 1970’s If income increases  people will have more children due to the income effectPeriod Effect: a change in fertility of women of all age groups in a similar wayA change of tastesWWII  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 Single group changes baby boom / baby busts3 cohort examples  1930’s, 1950’s, and 1970’s Percent of women who are childless have been increasing over the last 30 yearsFertility rate is tied to the growth rate in the economyNational and state level trends (Bel-jean packet reading)Objective costs and benefits of having childrenObjective Benefits Productive work of children (farm work and household production)Now less than beforeChildren as social insurance during parents’ old ageNow less than beforeTax ExemptionReduces taxes by taxpayer’s tax bracketTax creditReduces taxes dollar for dollarTax Benefits of ChildrenDeduction 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 childTax 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 CostsFood at home / food away from homeTransportation HousingChildcare and educationMedical careClothingCosts of college educationOpportunity Costs Forgone earning of mother and/or fatherForgone rate of return on savings and investmentsThese are higher for highly educated peopleSubjective costs and benefits of having childrenSubjective