January 22, 2003

Exercise 2 - Mortgages

Due 1/28/03

Get a copy of the Real Estate section in the Sunday Chapel Hill News. Find three data points: (1) The low-end detached house in Chapel Hill. (No fire damage, etc. You are going to live there!) (2) The median house. (3) A high-end house (not the extreme, but a typical expensive house).

We will use three human data points: (A) A store clerk making $7.50 per hour. (B) A fresh college graduate or a University staff person making $30,000 per year. (C) A faculty member or research triangle professional making $100,000.

Locate the mortgage rate for a fixed-rate 30-year mortgage by finding the mortgage table in the paper. For each person, apply the 28% rule and calculate the maximum house that person can afford at current mortgage rates. Assume that taxes locally are 2% of the value of a house, and assume that the person can get a 90% mortgage so the downpayment is 10%. Indicate where each person will live among our housing data points.

Repeat your calculations for each person and mortgage rates of 10% and 15%. Check FRED to make sure that these mortgage rates are possible. Hint: Daily/Weekly U.S. Financial Data, look here. (Write down the years when, if ever, the mortgage rate was that high.) Indicate where each person will live among our housing data points for each mortgage rate.

Conduct additional calculations as necessary to determine who lives in the high-end Chapel Hill house.

Posted by bparke at January 22, 2003 11:38 PM