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The microeconomics of buying and selling in housing markets

Outline

Introduction
Home or house ownership

The buying and selling process

Conclusion

 
 

 
The microeconomics of buying and selling in housing markets
Introduction
Shelter is one of the basic human needs. Investing in houses is currently doing well for investors in housing markets because individuals, firm and others, need houses for very many reasons. The population growth has resulted in the growth of housing markets because the demand for housing increases with the increase in the number of people in the economy. The microeconomics of buying and selling in housing markets deal with is about individuals or firm doing the business (investors) and the consumers’ buying behavior or habits. The microeconomics determine the demand and supply for both consumers and the housing business[1].
Home or house ownership
Consumers have their own reasons, some similar and others different, of purchasing a house. The whole process of buying a home appears simple when a customer has a good reason of buying a house. Some of the reasons are; ownership pride and security among other reasons. A customers get the freedom to purchase a house that suits their needs. After purchasing a house, a customer can customize the assets depending on their desires. For example, apply paint with any color, raise the volume of your CD player to any level, and decorate it the way the customer wants and much more[2].
Another reason for the increase in demand is because there is an appreciation of the real estate. The real estate market grows daily because many people want to own homes. The increase in demand has caused a sharp increase in prices. People buy a house or a home because of appreciation to help them to be on the safe, in case of inflation. Deductions in mortgage interests, also gives individuals a reason to buy a home or house because the tax favors homeowners. Real estate properties are recommendable when a person is buying because of the tax deductions on the properties. The taxes are deducted from the first time a home is bought because of income tax purposes. This makes it a good reason for people to be attracted into buying homes[3].
The other reason as to why individuals or firms may buy houses is because of the exclusion of capital gain, where a customer can buy and later sell the house after some time, and then pocket all the profit without being taxed. The preferential tax also attracts people to buy homes. Therefore, a person or firm is entitled to enjoy all the profit, which is considered a capital asset as long as a firm or a person has owned the house for more than one year. Businessmen mostly get themselves into this activity due to its tax favors. Home equity loan helps consumers who are home owners get an equity loan. The equity loan is less costly and deductible, and it gives a reason for consumers to buy houses or homes. Every month, a portion of a person’s salary is deducted to pay for a loan. A buyer benefits from paying for the house in installment and this helps to reduce the obligation.
The buying and selling process
Consumers become cautious while making decisions in the buying process. There are many things that strike in a person’s mind when deciding whether to buy a house or not to buy. How and why people make purchase decisions is what is referred to as consumer behavior. Marketers or sellers strive hard to meet with the consumer’s requirements by understanding their behavior and bring the appropriate taste to the market. They do anything to influence the consumer behavior by ensuring that the marketing strategies they apply result in increased sales and brand loyalty[4].
In getting to know the consumer behavior well, the marketers deeply examine the purchase decision processes. In the study of consumer behavior, a marketer gets to know why people prefer some products over the others, how they make their choices and how firms and companies use this information (knowledge) to provide their customers with their needs. In the purchase decision process, a consumer has to go through five stages namely; problem recognition, information search, alternative evaluation, purchase decision and the post purchase behavior.
Even after buying a house, consumers must make wise decisions to make sure that their needs are satisfied. The same case applies to the marketers or sellers (individuals, firms and companies). They have to do their best to attract and retain their stakeholders. In problem (need) recognition, the first stage, the individual intending to buy a house or home has good reason in involving in the process. The buyer’s perceived need or problem is a house of choice, but before making a step of buying it, a person has to find or search for information about the house[5].
In information search, which is the second step, the buyer gets a chance to seek for the value of the house. The customer can source information related to the house that satisfies the need. The customer has time to recall past experiences with houses, strategic plans so that they do not make a wrong purchase decision because of high risks and many others. The consumer can look or search for information from friends and family, from public sources including reports from consumers and market sources such as adverts, webs and sales people.
The third stage is the alternative evaluation, whereby the consumer may assess the value of the house. The consumer samples all data collected in the information search and evaluates it, choosing or prioritizing the best which can help make a wise decision in purchasing to avoid regret afterwards. This is the most important stage to guide the consumer buying a house before he purchases the house.
The next step is the purchase decision which is the purchase value. The consumer has three choices namely; from whom to buy the house, when to buy it and not buying the house. In considering from whom to buy, the consumer looks at the terms of sale, the past experience buying from the seller and the return policy. In looking at when to buy, the consumer considers the time pressure, the store atmosphere and the sale if it agrees with the amount of money he or she has at hand (cash). If the customer decides not to buy the house, he/she considers the best experience when they bought from the seller, the terms of sale, pleasantness of the shopping experience and many other reasons. The fifth and the last stage in purchasing decisions is the post purchase behavior, where the value in consumption or use is realized[6].
In post-purchase behavior, the consumer of the house compares the house with expectations and is good or not good with what they purchase. The consumer gets satisfied if what they buy matches with their expectations and is dissatisfied if what they buy is the opposite of what was expected. The perception of value by consumers, their communications and the repeat purchase behavior all affect the satisfaction or dissatisfaction of consumers. It is at this stage that consumers experience cognitive of dissonance. Many firms, companies, individuals (sellers) work hard to get positive communications among consumers who after getting satisfied come back with friends to the same seller, hence high sales. Some even use follow up calls to retain the consumers by convincing them that what they bought from them (house) is a good stuff and that they made a good decision.
Consumers exhibit rational behavior in their choices since their behavior is predictable. The marketers tell the consumers’ decision making by examining their behavior. Knowing that the decision making of consumers is ‘typical or representative’ the marketers presume that just one individual decision making unit can be used to determine a large group’s purchasing decision in a region or market[7]. People work out all the pros and cons before making purchase decisions, but they cannot compare them with machines in accuracy. It all depends on the steps they take in decision making while buying a commodity.
Real estate is an immovable property with crops, mineral salts, water or land and buildings on it. The business of real estate involves buying, selling or renting land, buildings or housing with an objective of making a profit. Buying real estate requires one to have a lot of cash, and that is why one has to be keen in making decisions while purchasing it. Despite the fact that large capital is required to invest in real estate business, the outcome is very rewarding. Many investors have run into this business, and it is growing rapidly in many nations. Real estate business has further evolved into other business fields, and some of them include; appraisal, brokering agencies, development, net leasing, property management among many others. In each field, specialization has evolved whereby you find a business specializing in a real estate, for instance; residential real estate, commercial real estate or industrial property real estate[8].
Recently, quite a large number of economists have learnt that lack of effective laws of real estate has hindered the investment in many countries that are developing. Individuals should realize that many societies, whether rich or poor, have their big percentage of total wealth coming from land and buildings. In the advanced economies, individuals and small companies who want to invest in real estate source their capital from mortgage loans. This has in one way, or another facilitated the growth of this business field. Banks offer such loans but with interests bearing in mind that they can easily sell the property to pay themselves just in case the person or a firm they have lent capital refuses to refund the cash back. The other real estate financing include; savings and loan associations, commercial banks, savings banks, life insurance companies, credit unions, real estate investment trusts and many others.
The more the population of people in the economy, the greater demand for housing. There are other factors that determine the demand for housing, and they include; consumer’s income, the price of housing, the taste of consumers, the price of substitutes and complements and many others[9]. There are negative impacts on society which are as a result of individual (micro) actors involved in the buying and selling process of real estate that even lead to speculative bubbles. When a housing price bubble bursts below its fundamental values, it can lead to social dislocation in the economy. It is through individuals, that we see the real estate business growing every single day, and it is through them, the business is seen going down.
Conclusion
There are a number of reasons as to why the society is impacted negatively by individuals who are (micro) actors who are involved in the real estate business. Some of them are; overvaluing the houses. It is understood that the government is the major cause of high prices of houses. These actors too when they raise prices end up causing the bubble or bursting of the bubble in real estate. This negatively affects the society and the economy at large. They may also go against or change the real estate laws in a way so that it can comply with their wishes. Oversupply of properties, lack of transparency, forging papers, going against cultural norms, uncontrolled price dynamics, short selling of real estate and many others are some of the causes that can lead to social dislocation in the economy.
 
 
 
 
[1] David Kreps, Microeconomic foundations. (Princeton: Princeton University Press, 2013), 192.
 
[2] Great Britain. A foot on the ladder: low cost home ownership assistance. (London: The Stationery Office, 2007), 12.
 
[3] Mitchell Levy, Home ownership: the American myth. (Cupertino, CA: Myth Breakers, 1993), 18.
 
[4] James Frances, A straightforward guide to buying and selling your own home. (Brighton: Straightforward, 2011), 29.
 
[5] Frank Kardes, Cronley, and Thomas Cline. Consumer behavior. (Mason, OH: South-Western, Cengage Learning, 2011), 173.
 
[6] Markus Stahlberg, and Ville Maila. Shopper marketing: how to increase purchase decisions at the point of sale. (London: Kogan Page, 2012), 183.
 
[7] Leef Dierks, Trust as a determinant of consumer behaviour under uncertainty: an empirical analysis of consumers’ reactions to a random external shock in Europe. (Göttingen: Cuvillier, 2005), 93.
 
[8] Norm Foster, The long weekend. (Toronto: Playwrights Canada Press, 2002), 129.
 
[9] Marion Steele, The demand for housing in Canada. (Ottawa: Statistics Canada, 1979), 241.

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