Assignment:
Question 1. You are looking at a new home in suburban New Jersey which is selling for $250,000. The rent on similar homes in the same development is $1,500 per month. Based on this information, what is the market user cost of owner-occupied housing?
Question 2. You have just met with a mortgage broker who informed you that you can finance 80% of the purchase price with an interest-only loan with an 6% contract rate. Your marginal tax rate is 25%, property taxes equal 3% of the house value, the premium on the insurance required by the lender equals .5% of the house value, and maintenance equal to 1.5% of the house value is sufficient to offset any physical deprecation. You believe that house price appreciation in this market will be about the same as the return you would receive by investing in the broader financial markets. Based on this information, how much would you be willing to pay for the house?
Question 3. You have a friend who is much more optimistic than you about this particular housing market. In particular, they believe that house price appreciation in this market will exceed the return you would receive by investing in the broader financial markets by 5%. If you are convinced of this future outlook by your friend, how much would you be willing to pay for the house?
Question 4. The federal government has decided to eliminate the mortgage interest and property tax deductions for all borrowers. If you decide that your friend is a little too optimistic and you return to your original assumption that house price appreciation in this market will be about the same as the return you would receive by investing in the broader financial markets, how much would you be willing to pay for the house after this change in tax policy?