Chadwick: To Buy or Not to Buy (A House)

That is the question for many potential homebuyers. (Apologies to William Shakespeare) But it is complicated by two other questions that must be answered by two other related parties – (1) the seller: To sell (at a distressed price) or not to sell (and wait till the market improves) and (2) the bank: To finance or not to finance.

In “normal” times (i.e. such as existed for most of the last half century) when interest rates were low, it was an opportune time for eager homebuyers to fulfill their dreams. In “normal” times, prevailing mortgage interest rates are the critical element in determining the price a buyer is willing to pay, because the interest rate is the fulcrum in the transaction.

In “normal” times, low interest rates give house prices an upward boost that sellers are happy to meet and that buyers know they can afford. In “normal” times, banks’ mortgage business thrives when interest rates are low and the arithmetic for approving a mortgage is straightforward and logical.

But we are not living in normal times.


Interest rates are as low as they have ever been in the lifetime of this country’s baby-boomers.

Even most of our parents never had a mortgage at rates as low as can be realized today.

So why isn’t the mortgage business booming? Why is there still such a glut of housing inventory aching to be bought and hoping to be sold? Why does it take a Federal Government tax credit to move the inventory?

I have been pondering those questions for some months and not coming up with a truly intelligent conclusion in my own mind. But a very recent encounter with refinancing a mortgage myself has opened my eyes.

Getting a mortgage has now become hugely complex and banks have been maneuvered into making it difficult.

The old rule of “monthly take-home pay of three times your mortgage payment” is no longer applicable. The old rule of providing statements proving the value of all your financial assets to the bank is no longer sufficient to satisfy the mortgage lenders. Now that statement is given a 30% haircut by the bank as it tallies up your assets. Given the volatility in the stock market, I can understand that application to a portfolio of stocks. But triple AAA rated bonds, yes, even Federal Government bonds, are being given the same 30% haircut. Who made that edict – the Federal Government itself or the banks? In either case, it says something about the state of fear in lending. Banks appear unwilling to take any risk at all – two earners are deemed no more secure than one earner (or so it seems).

“Houses, houses, everywhere, Nor any one to buy.” (Apologies – this time to Samuel Taylor Coleridge) So what can be done to end this logjam?

As a machinery analyst for years, I watched the inventories at major capital goods manufacturers. When they got too high, there was only one thing to do – give incentives to potential buyers to get rid of the inventory. The same is true every January in the retail industry. And today, that is what is needed in the glutted housing industry – a major incentive to get rid of the inventory. Without that, there will be no new housing built, and the industry will remain endlessly morbid.

"I would bring back the Federal Government’s tax credit for first time home-buyers and keep it in place until the inventory of housing is down to a level that will allow for new homebuilding." -Ravengate Partners, Patricia Chadwick

My solution may sound like blasphemy to fiscal conservatives (of whom I consider myself one) but I would bring back the Federal Government’s tax credit for first time home-buyers and keep it in place until the inventory of housing is down to a level that will allow for new homebuilding. Like extending unemployment benefits, this is a temporary solution that will have benefits for the private sector and ultimately for the government.

A tax credit may give the buyer that extra edge to accept a slightly higher bid, and coax the seller into parting with an illiquid asset. Financing will still be a problem, but one can only hope that if the demand for mortgages starts to pick up, the banks will see green (there is no doubt that they make nice money in the process) and will figure that the odds of every new mortgagee defaulting are mighty slim.

The Government will really not be out money in the long run because the increased economic activity will ultimately generate revenues – something it dearly needs to count on. It is a bit of a supply side argument – and I don’t mind that at all.

Patricia W. Chadwick has had more than 35 years of investment experience. She is the founder and president of Ravengate Partners LLC, a consulting firm that provides advice on financial markets and global economics.