Assignment
What
This writing assignment asks each student to
* look at the cost of living in Salt Lake County,
* examine alternative housing options in a time of great uncertainty,
* estimate the type of housing she/he is able to afford based on various assumptions,
* carry out a preliminary analysis, and
* present findings in writing.
Objectives
There are SIX specific objectives in this assignment:
1. Help students understand the housing policy context—the high cost of housing and the uniqueness of housing from the perspective of a consumer; 2. Make tentative housing decisions based on various sensible assumptions;
3. Explore online data sources that are available for housing analysis;
4. Practice basic writing and presentation skills;
5. Conduct peer reviews and communicate findings in a clear, concise, and logical manner;
6. Prepare for Assignment 2.
Your Case Study
Suppose that you are a 22-year-old college student. You are going to graduate from the University of Utah with a bachelor’s degree in social sciences, facing many options in a time of great personal and market uncertainty.
UNCERTAIN ECONOMY: The U.S. economy is in a period of great uncertainty. While youth unemployment has declined to a low level, Covid-19 has wreaked havoc on the labor and housing market and affected young people–new labor and housing market entrants.
Paradoxically, housing prices have reached an all-time high. So has rent. There is a short supply of housing in the Salt Lake region. Rental affordability has reached a “crisis” level, according to the Salt Lake City Council. No one feels the pinch more than young people, who ‘compete’ in the labor and housing market for the first time.
Moreover, there is a growing divide between the rich and the poor. Although there are many low-paying jobs, it is challenging for new college graduates like you to develop your careers. The Millennial generation (anyone born between 1981 and 1996) has lower headship (form fewer independent households) and homeownership rates than their parent generation when they were at the same young age—a post-WWII first according to Pew Research. Housing is the #1 concern for many.
On a positive note, the economy in Utah has been among the strongest in the nation. Young Utahans have enjoyed a strong labor market and relatively high homeownership. Unlike many of your peers who are swimming in student debt, you are nearly debt-free in this hypothetical case.
Finally, you are aware of the differences between investment and consumption with respect to housing, even though the thin line dividing the two is not always clear. Whereas rental units are primarily for consumption, homeownership can be an instrument for both investment and consumption. Homeownership is considered a primary vehicle for wealth accumulation, as it forces homebuyers to be disciplined in their finance. However, if the Great Recession in 2008 taught us anything, it is that homebuyers CAN lose money and wealth.
POSSIBLE MARRIAGE: You and your fiancé(e) might get married in the coming year, in which case your household would have more income (no kids for the time being). In this exercise, you would consider THREE possible scenarios:
* getting married
* remaining single
* moving back home
EMPLOYMENT STATUS: You have decided to stay in Salt Lake County for now since your family is nearby and you have a short-term job lined up. Your job is on the campus of the University of Utah.
Although your pay rate is uncertain at the moment, you will work full time and you should get somewhere very close to the “living wage” of the county from the start. Since you are a newcomer in your professional field, you do NOT expect to reach the median salary of your profession soon after graduation. Assume that your fiancé(e) will work full time too. Please write down your calculation and tell us how you get your numbers.
You can find information about the living wage in Salt Lake County through the following link: http://livingwage.mit.edu/counties/49035
Links to an external site.
(tips: You just pick a number within the suggested range. In other words, you can assume a slightly larger number or a slightly smaller number as long as you justify it.) The living wage for one adult living alone is higher than one adult in a two-adult living arrangement (assuming both are working), because two adults can share the living cost.
LOCAL MARKETS: Your first choice is to rent an apartment by yourself, but you are considering homeownership. You have heard that the housing and labor markets are unstable. Interest rates have risen from historical lows because the Federal Reserve Board has started Quantitative Tightening
Links to an external site.
. (Mortgage Interest rates historically: https://www.bankrate.com/mortgages/historical-mortgage-rates/
Links to an external site.
; The current 30yr fixed rate: https://www.bankrate.com/mortgages/30-year-mortgage-rates/
Links to an external site.
). It might be a tricky time to buy a starter home of your own. You have also heard that Utah still has relatively high rates of personal bankruptcy, despite a strong economy. You are puzzled by the apparent contradiction. Therefore, you plan to do some additional research on the cost of owning and renting—and discuss the possible risks of owning in your analysis. You want to be prudent in your decisions.
DECISION TIME: Your impending departure from college life will affect your budget and your choice of housing. Your eligibility for dorm residence will expire after your graduation and you are reluctant to move back with your folks. After taking some economics and housing courses, you want to compare your housing choices and estimate the cost of living under different assumptions. Ignore costs such as the cost of holding a marriage ceremony. You know that you have to make up numbers along the way, based on your best guesses or assumptions. But you plan to carefully document your assumptions and write down your research so that you can use them in the future.
ASSUMPTIONS: To simplify your calculation and comparison, you assume that your rent or mortgage payment will cover taxes and insurance (which is not necessarily the case in real life). You do NOT have to provide a list of expenses. However, you really want to be close to your job which is on the campus of the University of Utah.
The future is inherently uncertain and changeable. You plan to make assumptions for those that are unknown at the moment. For instance, you can estimate your wage based on the information given in the previous section. You can also assume mortgage interest rates for 30-year fixed conventional loans will remain at the current level or only increase slightly. You can assume that your fiancé(e) will also work full time. Please clearly state your assumptions in your assignment.
Housing Choices: There are THREE housing options in front of you, which are
1. moving back with your parents, which is rent-free (not necessarily stress-free);
2. renting by yourself and remaining single;
3. buying a home with your fiancé(e).
You will calculate the cost of each in great detail before you make a decision.
With option (2), please assume the landlord covers utilities.
If you choose option 3:
* Choose if you buy a single-family home or a condo. In case you choose a condo, please factor any condo fee into your monthly payment. If you do not have the number directly, you can estimate or assume. State your assumption clearly.
* Choose the type of mortgage that is right for you. Is it a FHA loan Links to an external site. , a VA loan Links to an external site. , or a conventional loan Links to an external site. (do a bit of research to find out the differences)? Is it a 30 year fixed or an ARM Links to an external site. ? Justify your choice. Do some research about different loan types, your eligibility, the issuer, and if there is a prepayment penalty, please. However, do not worry too much about whether you have made the “right” choice as long as you justify your choice.
* Your parents have promised to support you with a 20% down payment. Therefore, you do not have to worry about the down payment. You know that, with the help of your parents, you can avoid some additional costs such as paying for private mortgage insurance OR a higher interest rate. Do some research about what they are, please. Additionally, you have saved up enough to cover the closing cost associated with the mortgage loan. Please do some research about how much closing cost should you need to have? Again, a ballpark estimate is fine.
* You do NOT want to under-estimate the cost of homeownership (many in the past often under-estimated the cost and over-estimated the earnings). The purchase price is only part of the total cost. Homeownership restricts movement and mobility. There may be unforeseen repair costs. You want to consider these potential issues in your calculation.
You also want to talk about the employment situation in the Salt Lake region, which underpins the growth of housing prices and rent. It is also relevant to your income growth. What is your expectation for future housing appreciation and rent increases?
Here are some articles about the cost of homeownership.
RENT OR OWN?
Links to an external site.
Renting vs. Buying a Home: Steps To Decide Which Is Best for You
Elements of Paper
Your submission should include a number of elements:
1. an informative title for the report;
2. an introduction telling the reader what you are doing and why;
3. a brief discussion of the local housing and labor market condition;
4. your assumptions and calculations;
5. the descriptions and some photos of the properties of your interest;
6. a discussion of pros and cons of each option;
7. a comparison table of the monthly expense of each option;
8. a concluding paragraph which includes your tentative choice.
You also want to clearly state your assumptions, cite your data sources, follow a reference guide, and document the logic of your calculations. The purpose is that the readers can replicate your findings.
While you are required to have rough estimates in this exercise, you plan to carefully discuss the pros and cons of the THREE housing options. You will also discuss the type of mortgage you may use if you choose to buy. You do NOT have to make a decision now since you are still in school. However, you plan to keep a keen eye on the market and use this as a reference point.
Steps in Analysis
Here are the recommended steps for this housing analysis:
1. Calculate how much you may earn after graduation (married vs. single). Use the living wage calculator. Do not be overly optimistic.
2. Use calculators to estimate the amount of rent you are able to pay and the home you are able to afford. You will try to limit your housing expenses within 35% of your income.
3. Go to a local listing website and identify possible homes and apartments that are close to your job and are within your budget.
4. Compare and contrast the THREE housing choices you have. Consider the second-order choice that you have to make, e.g., type of mortgages and housing type.
Data Sources: Here is a list of online sources from which you can get information about the cost of living and the housing market. You do not need to use all of them and you can find your own sources. Make sure to cite your data sources. There are a number of calculators available online.
* Here is the source for mortgage interest rates. Use the rate for the 30-year fixed mortgage (How is it different from a 5/1 ARM or jumbo loan?): http://www.bankrate.com/finance/mortgages/current-interest-rates.aspxLinks to an external site.
* Here are calculators for how much home you may be able to afford to purchase: http://www.zillow.com/mortgage-calculator/house-affordability/Links to an external site. http://cgi.money.cnn.com/tools/houseafford/houseafford.htmlLinks to an external site. http://www.realtor.com/home-finance/financial-calculators/home-affordability-calculator.aspxLinks to an external site. http://www.bankrate.com/calculators/mortgages/mortgage-calculator.aspxLinks to an external site.
* How much can I afford for rent? http://www.zillow.com/mortgage-calculator/house-affordability/Links to an external site.
* You can find homes for sale in Salt Lake County through the following link: http://utahrealestate.comLinks to an external site.
* You can find apartments for rent through the following links: http://www.zillow.com/salt-lake-city-ut/rent/Links to an external site.
* Utah Housing Corporation may provide help for low-income Utahans to purchase homes: https://utahhousingcorp.org/ Links to an external site. Links to an external site.
Please properly reference using the reference guide available in Announcements.
Housing Conditions: Find the best home and apartment that you can afford. You are considering homes and apartments that are around 600-1,800 sq.ft. IGNORE homes that are in foreclosure and short-sale. Do some research about these, if you are curious.
The home can be either a single-family home or a condo. If it is a condo or a PUD (planned unit development), you should consider fees in your monthly payment. If you purchase an existing home, you should set aside some funds for possible updates and renovations. You plan to document the location, the rent or the asking price of the home. Please also discuss the size and the housing style.
Suggestions
1. Use short paragraphs.
2. Include page numbers, titles, and your name.
3. Use font type consistently throughout the report.
4. Separate the report into sections and use section titles to improve readability.
5. DO NOT use bullet points excessively in your comparison; please use a narrative approach in your writing.
6. Again, please include an introductory paragraph in the beginning, telling the readers what you are going to do in the report. Avoid any technical detail in the introduction. Please include a concluding paragraph in the end, highlighting your tentative choice and major findings.
7. Again, please include two tables–one for income and two for the three housing options. Would you be qualified for mortgage interest deduction? What type of mortgage will you use and why?
8. You do not need to read the textbook or assigned reading to complete this assignment. However, the textbook does provide some market information.
9. Include a title for your report, page numbers. Proofread your work before submission. Write formally.
