Problem 1: The following two figures illustrate historical home price trend and interest rate for the 30-years fixed rate mortgage in the United States. Based on the information, please answer the following questions if today were in 2013. Assuming that history will repeat itself, what do you think of the U.S. housing market for the next 10 years? How about mortgage rate for the next 10 years? Based on your prediction, answer the two questions below:a)If you have money, should you invest in the housing market?b)If your answer in a) is “Yes”, and one lender allows you to borrow money, should you borrow money to buy the property? Why? THE HISTORICAL PERSPECTIVE: 37 years, 3 cycles16%12%8%(1976Q1-2013Q1)4%Nominal year-over-year growth rate+12%Real year-over-year growth rateReal cumulative changes shown in boxes0%-4%-12%-8%+13-12%Real Growth =HPI Growth - CPI GrowthWhere:-16%-12%HPI Growth = In(HPI(t)/HPI(t-4))CPI Growth = In(CPI(t)/CPI(t-4))1976Q11977Q11978Q11979Q11980Q1+62%1981Q11983Q11984Q11985Q11986Q11987Q11988Q1-37%1990Q11992Q11993Q11994Q11995Q11996Q11997Q11998Q11999Q12000Q12001Q12002Q12004Q12005Q12006Q12007Q12003Q12008Q12009Q12010Q12011Q12012Q12013Q11982Q11989Q11991Q1 30-year Fixed Morgate Rate: 1971-201318%16%14%12%Historical average: 8.6%10%8%6%4%2%0%2013Q32012Q32011Q32010Q32009Q32008Q32007Q32006Q32005Q32004Q32003Q32002Q32001Q32000Q31999Q31998Q31997Q31996Q31995Q31994Q31993Q31992Q31991Q31990Q31989Q31988Q31987Q31986Q31985Q31984Q31983Q31982Q31981Q31980Q31979Q31978Q31977Q31976Q31975Q31974Q31973Q31972Q31971Q3

Mortgage rate: It refers to the rate which is applied on the mortgage. The average of the mortgage…

Answered: Problem 1: The following two figures…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Problem 1: The following two figures illustrate historical home price trend and interest rate for the 30-years fixed rate mortgage in the United States. Based on the information, please answer the following questions if today were in 2013.

Assuming that history will repeat itself, what do you think of the U.S. housing market for the next 10 years? How about mortgage rate for the next 10 years?

Based on your prediction, answer the two questions below:

a)If you have money, should you invest in the housing market?

b)If your answer in a) is “Yes”, and one lender allows you to borrow money, should you borrow money to buy the property? Why?

THE HISTORICAL PERSPECTIVE: 37 years, 3 cycles
16%
12%
8%
(1976Q1-2013Q1)
4%
Nominal year-over-year growth rate
+12%
Real year-over-year growth rate
Real cumulative changes shown in boxes
0%
-4%
-12%
-8%
+13
-12%
Real Growth =HPI Growth - CPI Growth
Where:
-16%
-12%
HPI Growth = In(HPI(t)/HPI(t-4))
CPI Growth = In(CPI(t)/CPI(t-4))
1976Q1
1977Q1
1978Q1
1979Q1
1980Q1
+62%
1981Q1
1983Q1
1984Q1
1985Q1
1986Q1
1987Q1
1988Q1
-37%
1990Q1
1992Q1
1993Q1
1994Q1
1995Q1
1996Q1
1997Q1
1998Q1
1999Q1
2000Q1
2001Q1
2002Q1
2004Q1
2005Q1
2006Q1
2007Q1
2003Q1
2008Q1
2009Q1
2010Q1
2011Q1
2012Q1
2013Q1
1982Q1
1989Q1
1991Q1

30-year Fixed Morgate Rate: 1971-2013
18%
16%
14%
12%
Historical average: 8.6%
10%
8%
6%
4%
2%
0%
2013Q3
2012Q3
2011Q3
2010Q3
2009Q3
2008Q3
2007Q3
2006Q3
2005Q3
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2003Q3
2002Q3
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1998Q3
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1991Q3
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1982Q3
1981Q3
1980Q3
1979Q3
1978Q3
1977Q3
1976Q3
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1974Q3
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1972Q3
1971Q3

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