Fear and finance in real estate

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Homes are cheaper than ever (OK, cheaper than they've been since 2003, to be precise), and rates are lower than ever, yet sales activity is relatively low and stagnant.

A study published this week by Yahoo! Real Estate took a deep dive inside the minds of renters and owners to get to the bottom of this puzzling truth. Fifty-nine percent of the renters surveyed said they would prefer to own their homes.

So, what on earth is stopping them? The answers were loud and clear: fear and finance, and in these renters' minds the twain definitely do meet.

At least one-quarter of the renters and owners in the market identified one or more of the following as their primary fears about buying a home:

• worry about mortgage payments rising (25 percent);
• concern that their credit is not good enough (25 percent); and
• the fear that property taxes will rise (28 percent).

A full 30 percent of the owners and renters who self-identified as interested in buying a home expressed concerns that they might not be able to scrape up enough cash for a down payment.

And the No. 1 concern was arguably the one that is the most contradicted by the facts of the current market climate: 36 percent of buyers were fearful about the cost of owning a home.

Source: Yahoo! Real Estate Home Horizons 2012 survey -- based on responses 415 buyers/renters in the market to purchase a home.

Among the nearly one-third of survey respondents who were renters, top reasons for renting included:

• don't have money for a down payment (53 percent);
• insufficient capital/income (51 percent);
• insufficient credit/won't qualify for a loan (38 percent); and
• don't want long-term debt (25 percent). 

Source: Yahoo! Real Estate Home Horizons 2012 survey -- based on responses 496 renters. 

The paradox is inescapable -- prices and rates are at bargain-basement lows, and renters and prospective buyers are fearful that homeownership just costs too much.

At first glance, fear seems like one of those nebulous concepts not worth even trying to explore in the context of the hard numbers and market dynamics of real estate economics, but economists have long known otherwise.

In fact, I conceive of homebuyer fear as holding down one end of the consumer confidence continuum, a measurement of consumer mindsets that has long been unanimously understood to exert a powerful influence on the hard numbers that drive market recovery, health and stability.

Against that backdrop, the power of studies like this one becomes much more clear. Identifying what buyers' fears are, specifically, empowers agents and sellers to address them in the way they market and describe their listings.

Beyond how it helps individual players in the market, it also holds the potential to course-correct public policy when it comes to buyer education, mortgage lending guidelines and buyer assistance programs.

(The latter assumes that we as a nation do actually see smart homeownership as a valuable social norm worthy of furthering -- an admittedly debatable assumption these days.)

For example, buyers might be confused or misinformed on subjects like how much lenders actually require in the way of a down payment, about the level of control they have over whether and by how much their mortgage payments will adjust (30-year-fixed, anyone?), and about how relatively straightforward it is to determine whether their credit qualifies them for a mortgage (and if not, their ability to take steps over time to remediate it).

Knowing this makes it sensible for sellers to incorporate mortgage scenarios into their property marketing materials.

In the same vein, a frequent concern of buyers I encounter when it comes to the total costs of homeownership is that owners live under the constant threat of massive repair bills. The uninitiated might not understand quite how much power homeowners have to mitigate and manage that exposure through things like homeowners insurance, flood insurance, earthquake insurance, and even basic homebuying musts like property inspections and home warranty policies.

To the extent that any of these misunderstandings or misinformation are paralyzing otherwise qualified buyers who can actually afford the homes they want, it seems like education to correct these misconceptions and empower wannabe buyers should be a top priority of any entity -- public or private -- that has an interest in eliminating that bottleneck and helping buyers take advantage of today's low prices and rates.

But maybe there's another way to look at this whole thing. Maybe this whole conversation about homebuying fears is actually a very good sign that would-be buyers have learned from the mistakes of the preceding generation of homeowners and are determined not to repeat them. This fear could be read as caution -- and caution seems like a very wise sentiment with which to approach the endeavor of buying and owning a home.

Maybe these buyers-to-be have witnessed the devastation of the foreclosure crisis, firsthand or otherwise -- 36 percent of the total survey respondents personally know someone who has lost a home -- and have decided to get educated and make sure they don't hop off the homebuying fence until they are comfortable that they are making sustainable decisions when it comes to all the costs associated with homeownership.

This seems especially likely when you map their specific concerns to some of the most notorious causes cited for the housing market meltdown, including adjustable mortgages, zero-down loans and interest-only mortgages and some of the most widely reported impacts the housing crisis has had on the mortgage market (namely, the universal tightening of mortgage guidelines).

During my tenure actively selling homes as a real estate broker, I saw lots of consumers make less-than-optimal decisions as a result of their fears and freakouts. But there is a basic level of fear or anxiety about the gravity of the financial and life commitments involved in buying a home and taking on a mortgage that is not necessarily dysfunctional.

In fact, it can be an indicator that the fearful individual is actually taking the matter precisely as seriously as a prudent person would.

Tara-Nicholle Nelson is author of "The Savvy Woman's Homebuying Handbook" and "Trillion Dollar Women: Use Your Power to Make Buying and Remodeling Decisions." Tara is also the Consumer Ambassador and Educator for real estate listings search site Trulia.com. Ask her a real estate question online or visit her website, www.rethinkrealestate.com.

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