Life-cycle cost analysis of home-ownership
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2009
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Abstract
This research analyzes various economic and cost parameters to comprehend life-cycle
cost of home buying and home ownership. The framework of this study lies in the
fundamental concepts of life-cycle cost analysis, time-value of money, opportunity costs,
cost forecasting, and inclusion of cradle-to grave expenses and revenues. This work was
aimed for the benefit of first-time homebuyers as well as owner-occupied homeowners.
A life-cycle cost analysis methodology has been developed, which can be used as a tool
for informed decision making. The bottom line of this methodology is to alter various
parameters in order to find the lowest possible equal uniform net final monthly expense
(EUNFME). This methodology does not consider any elements that cannot be converted
into monetary value such as psychological and social values.
An Excel spreadsheet program was developed to organize the calculations and analysis
according to the developed methodology. Then, program codes were written in Matlab,
which was used in analyzing a typical purchase scenario, using relevant data for a median
priced single-family house located in O'ahu, Hawai'i. Relevant economic time series
data were collected and used for cost forecasting, price escalation, and to calculate real
rate of return. The analysis of the typical example varied multiple purchasing conditions
such as mortgage interest rate, discount points, size of down payment, and alternative
investment opportunities to arrive at a rational buying decision. Buying versus renting
analysis was also included in the purchase evaluation.
Buying a house is a complex process, a marriage between comforts of a facility and
financing in a property. Analysis of the example indicated that in order to minimize the
equal uniform net final monthly expenses, buyer should explore conditions that reduce
opportunity losses and maximizes the economic returns. Some of these conditions are:
(i) paying least amount of down payment when CD rates are higher than mortgage rates,
(ii) exploring a suitable combination of mortgage rate and discount points that optimizes
the economic benefits. The trends of the results are independent of the purchase price of
the house, but are dependent on all the other purchase parameters.
Purchasing an owner-occupied house may bring some tax return, but benefits are often
overemphasized. Similarly, buying a house as an investment alternative was not found to
be attractive under many conditions. The housing affordability index (HAI) put out by
the realtors is found to be more liberal in the absence of comprehensive life-cycle cost
consideration of home-ownership. In many occasions renting a house could serve the
needed functional purpose and may prove to be economically more attractive than an
owner-occupied house.
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Keywords
Housing Crisis, Life-Cycle Cost Models, Home Ownership Life Cycle Costs, Home Affordability, Buying versus Renting, Mortgage Severity Index (MSI), Time Value of Money, Opportunity Cost, Cost Forecasting
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USA
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