Home Buyers in Search of Clarity
In November 2010, I wrote a column in which I noted that investors, consumers and businesses were suffering from a deficiency of vitamin C—for certainty. Now, more than two years later, I could write much the same column. The election has settled one question, but there is still uncertainty about the “fiscal cliff,” future tax rates, the ongoing financial crisis in Europe and conflicting economic indicators at home.
Typical of the reports in my e-mail is a news release about the Advisor Confidence Index, which gauges the views of financial advisers on the U.S. economy and the stock market. Recently, advisers have expressed concern about everything from corporate earnings to inflation. Three researchers from the University of Chicago and Stanford University have even come up with a tool to measure the level of uncertainty and its effects on spending and hiring.
I’d like to offer my take on how uncertainty could affect a household decision—namely, purchasing a home, whether you’re buying for the first time, moving up or considering a vacation retreat. Aside from analyzing how a house suits your personal circumstances—Is it in a good location? Does it fit my budget?—you also have to factor in larger issues that are beyond your control. You may, for example, wonder whether the housing market has finally hit bottom, and how easy it would be to sell your home if you had to do so unexpectedly (see our outlook on housing). You might worry about tapping your savings for a down payment when you may need the cash later for higher taxes or health care costs.
You could be reluctant to take advantage of rock-bottom interest rates on adjustable-rate mortgages because you have misgivings about the Federal Reserve Board’s ability to keep rates low indefinitely. And if you are inclined to borrow, you may be put off by a lending process that can take six weeks or more even if your credit score is stellar—and could be derailed if the appraisal doesn’t pass muster or the paperwork is delayed.
“Requests for additional documents can seem ridiculous and endless,” says associate editor Pat Esswein, our housing specialist. One Kiplinger’s reader reports that when he contracted to buy a condo in Florida, the bank “treated my loan application like a robber’s demand note,” despite his credit score of just under 800 and a 30% down payment.
A few fixes. I’d like to suggest a few remedies for this state of affairs. For example, if Congress were to agree on a compromise to avoid the fiscal cliff of dire tax hikes and spending cuts, home buyers (and businesses) might be more willing to spend. If consumers could be certain of stable (or lower) tax rates, they might be more willing to part with their cash (or even give up all or part of the mortgage-interest deduction). If the government had a more rational fiscal policy and didn’t depend so much on the Fed, borrowers might be more confident that rates wouldn’t spike. And if borrowers didn’t feel as if they were being treated like criminals, they might be more willing to apply for mortgages.
As senior editor Anne Kates Smith reports in our investing outlook, the fiscal cliff has also been exacting an “uncertainty penalty” on companies reluctant to spend on capital equipment or staffing. But, she thinks, the picture should brighten as the “clouds of fiscal uncertainty” begin to part later in 2013. “Good-enough economic growth will be able to keep companies in the black and deliver the goods to shareholders.” In the meantime, we’ll do our best to keep your finances healthy with a megadose of vitamin C for clarity.
This article first appeared in Kiplinger's Personal Finance magazine. For more help with your personal finances and investments, please subscribe to the magazine. It might be the best investment you ever make.