FINC 349 LECTURE 13

Chapters to Focus On:
- Chapters one and two: Know the vernacular definitions and basic concepts.
- Chapter five: Understand key areas without needing analytical pricing methods.
- Chapter seven: Important economic relationships and consumer behavior affecting housing prices.

Mortgage Types:
- Fixed Rate Mortgages: Loans with a constant interest rate, making repayment predictable.
- Adjustable Rate Mortgages (ARMs): Loans where the interest rate may change based on market conditions.
Characteristics of ARMs:
- Often share features with fixed-rate options; important to know differences for examinations.
General Advice:
- Focus on understanding definitions and concepts instead of mechanics.
- Consider looking at your textbook for visuals and additional details.

Consumer Confidence: Influences housing prices; as individual wealth increases, consumption rises, boosting the economy.
Personal Consumption:
- 70% of U.S. GDP derived from consumption.
- Wealth influences buying capabilities—if individuals feel rich, they spend more; conversely, economic decline leads to decreased spending.
Demographics of Consumption:
- Two-thirds of consumer spending is done by females.
Implications for Students:
- Understand macroeconomic and microeconomic fundamentals.
- Basic statistics, accounting, and finance knowledge is essential for interviews and professional meetings.

Renting vs. Owning:
- Renting typically involves less responsibility (maintenance, repairs) compared to owning a property.
- Owners are responsible for upkeep, property taxes, and general improvements.
- Rental payments do not build equity; owners build equity through property value increases over time.
Important Questions:
- What does renting versus owning mean in terms of responsibilities and financial obligations?
- As a renter, maintenance is typically handled by the property owner; as an owner, these responsibilities fall to you.
Financial Obligations of Owners: Includes paying for:
- Property Taxes: Tax-deductible benefits for homeowners.
- Home Insurance: Protects against potential liabilities.
- Maintenance and Upkeep: Ongoing costs to retain property value.

Example Scenario:
- Rental income for a property set at $12,000 per year.
- Purchase price of the property: $150,000 with a down payment of $30,000.
- Loan amount is $120,000 with a fixed interest rate of 4.5% over 30 years.

\text{Debt-to-Equity Ratio} = \frac{\text{Loan Amount}}{\text{Total Equity}} = \frac{120,000}{150,000} = 0.80 \text{ or } 80\%

Cash Flow Inflows and Outflows:
- Assess property appreciation at a growth rate of 2% annually.
- Deductible expenses include property taxes and interest from the mortgage payments.

Understanding Tax Implications:
- Both property taxes and mortgage interest are tax-deductible, generating a "tax shield" that offsets income taxes.
Differential Analysis:
- Compare the net present value of owning versus renting to ascertain the financial benefit.
Key Return Metrics:
- Knowledge of various economic indicators and their implications (e.g., WACC, CAPM). Understanding and computing these can aid in investment decisions.

Focus on understanding definitions and theoretical applications rather than rote memorization.
Practice calculations by hand, avoiding reliance on technology initially to understand underlying concepts.
Prepare for short-answer and problem-solving types of exam formats that focus on theoretical comprehension.
Be aware that final assessments will likely evaluate your ability to apply learned principles dynamically in varying contexts.
Homework Expectations:
- Engage in problem-solving beyond just familiarity with content; practical applications matter in finance.