Question

Explain why you would be more or less willing to buy a house under the following circumstances:

a. You just inherited $\$100,000$.

b. Real estate commissions fall from $6\%$of the sales price to $5\%$of the sales price.

c. You expect Microsoft stock to double in value next year.

d. Prices in the stock market become more volatile.

e. You expect housing prices to fall.

Short answer

Part (a) If one has just inherited $\$100,000$, he will be more ready to purchase a home.

Part (b) If the real estate commission decreases, more people will be willing to buy a home.

Part (c) If one believes that M Company's stock price will quadruple next year, one will be less willing to buy a home.

Part (d) If the stock market becomes more volatile, people will be more willing to buy a house.

Part (e) If one believes that the price of a house would fall, he will be less eager to purchase one.

Step-by-step solution

Introduction 

The amount demanded of an asset is directly related to wealth, expected return on asset, and liquidity of the asset, and negatively proportional to expected return on alternative asset, liquidity of the alternative asset, according to the theory of portfolio choice.

Explanation to part (a)

If one has just received $\$100,000$, he may be more ready to buy a house because he now has more money to spend and may want to put that money toward the purchase of a new home.

As a result, if one has just inherited $\$100,000$, he will be more ready to purchase a home.

Explanation to part (b)

If the real estate commission is reduced from $\$6$percent to $\$5$percent, people will be more willing to buy a new house because it would cost less than it did previously.

As a result, if the real estate commission decreases, more people will be willing to buy a home.

Explanation to part (c)

If one believes that the stock price of M Company will double next year, he will be less willing to buy a property because he can now earn more money by purchasing M Company stocks now and selling them a year later. A house would only be purchased if the gain in the price of the house outweighed the rise in the stock price.

As a result, if one believes that M Company's stock price will quadruple next year, one will be less willing to buy a home.

Explanation to part (d)

If stock market prices become more unpredictable, investors will be more inclined to purchase a home since the stock market will become riskier, and an investor would want to invest in a less risky environment, which the purchase of a home will provide.

As a result, if the stock market becomes more volatile, people will be more willing to buy a house.

Explanation to part (e)

If one believes that the price of a property will fall, he will be less eager to acquire one because he will lose money on the purchase or because he will be able to buy the house at a lower price at a later period.

As a result, if one believes that the price of a house would fall, he will be less eager to purchase one.