Ellie and Vince are trying to decide whether to purchase a new home. The house they want is priced at $200,000. Annual expenses such as maintenance, taxes, and insurance equal 4 percent of the home’s value. If properly maintained, the house’s real value is not expected to change. The real interest rate in the economy is 6 percent, and Ellie and Vince can qualify to borrow the full amount of the purchase price (for simplicity, assume no down payment) at that rate. Ignore the fact that mortgage interest payments are tax-deductible in the United States. (LO4)

a. Ellie and Vince would be willing to pay $1,500 monthly rent to live in a house of the same quality as the one they are thinking about purchasing. Should they buy the house?

b. Does the answer to part a change if they are willing to pay $2,000 monthly rent?

c. Does the answer to part a change if the real interest rate is 4 percent instead of 6 percent?

d. Does the answer to part a change if the developer offers to sell Ellie and Vince the house for $150,000?

e. Why do home-building companies dislike high interest rates?