For many people purchasing a new home is one of the biggest purchases they will ever make.   It is a decision that requires a good financial plan, and if there are any bad decisions made those decisions will have long term consequences.   As we have seen over the last few years some people purchased homes will little regard to the financial impact that it would have on their lifestyle.   Buying a new home should not be an impulse decision that a person makes.
First, the prices of houses are typically very high, and purchasing a new house will greatly deplete the savings of an individual.   The demand of houses is highly price elastic as we have seen due to the housing bubble. Economic theories state that the larger the proportion of income a certain purchase requires, the more price elastic the demand will be. With the costs envoled in purchasing   a new house, it will require the spending of a large proportion of a person’s income, and   this will greatly lower the person’s purchasing power when they make the decision to purchase a new house.
A few of the principals of economics that can be used when purchasing a new home are people face trade offs, people respond to incentives, and the cost of something is what you give up.   When purchasing a new home each decision comes at a cost, and each cost should have a good trade off with it.   The costs to purchase a new house will deplete a large portion of our savings.   However the tradeoffs for the same amount of money could be sending our childern to college, retiring earlier, or purchasing a new vehicle. When purchasing a new home the pro’s and con’s need to be evaluated, and the obvious and implicit costs of buying the new house need to be considered.   Additionally another principal known as “Scarcity” needs to be looked at, and it is when economists study situations where needs or wants exceed means. Therefore, people have to make choices. (Slembeck, 2006)  
After comparing the financial obligations with...