The American Dream of Home Ownership Has Become a Nightmare

Culturally a decent house has been a symbol of middle-class family life. Practically, it has been a secure shelter for the children, along with access to a good free education. Financially it has been regarded as a safe store of value, a shield against the vagaries of the economy, and a long-term retirement asset. Indeed, for decades, a house has been the largest asset on the balance sheet of the average American family. In recent years, it provided boatloads of money to homeowners through recourse to cash-out refinancing, in effect an equity withdrawal from their once rapidly appreciating home values.

These days the American dream of home ownership has turned into a nightmare for millions of families. They wake every day to the reality of a horrible decline in the value of the home that has meant so much to them. The pressure to meet mortgage payments on homes that have lost value has been especially shocking—and unjust—for the millions of unemployed through no fault of their own. For the baby boomer generation, a home is now seen not as the cornerstone of advancement but a ball and chain, restricting their ability and their mobility to move and seek out a job at another location. They just cannot afford to abandon the equity they have in their homes—and they can't sell in this miserable market.

American homeowners have experienced an unprecedented decline in their equity net of mortgage debt. The seemingly never-ending fall in prices has brought an average decline of at least 30 percent. Furthermore, the country is now going through an unprecedented nationwide slide in sales, despite the fact that long-term mortgage interest rates nationwide plummeted recently to a record low of 4.3 percent before rising slightly. The result is that home occupancy costs for home purchases are now down to roughly 15 percent of family income, dramatically lower than the conventional, affordable figure of 25 percent of family income devoted to home occupancy costs. Yet new home sales, pending home sales, and mortgage applications are down to a 13-year low.

The economics of home ownership could hardly be more disastrously opposite to the expectations of generation after generation. Millions of homes have been foreclosed upon. About 11 million residential properties, or about 23 percent of such properties with mortgages, have mortgage balances that exceed the home's value. Given the total inventory, and the shadow inventory of empty homes, many experts expect prices to fall another 5 to 10 percent. That would bring the decline to 40 percent from peak-to-trough and expose an estimated 40 percent of homeowners to mortgages in excess of the value of their homes.

The growing risk of disappearing equity invites more strategic defaults on mortgages. Homeowners with negative equity are tempted simply to mail in their keys to their friendly lender even if they can afford the mortgage payment. Banks don't want to take the deflated properties onto their books because they will then have to declare a financial loss and still have to worry about maintaining the properties.

Little wonder foreclosure has not been enforced on a quarter of the people who haven't made a single mortgage payment in the last two years. A staggering 8 million home loans are in some state of delinquency, default, or foreclosure. Another 8 million homeowners are estimated to have mortgages representing 95 percent or more of the value of their homes, leaving them with 5 percent or less equity in their homes and thus vulnerable to further price declines. A huge percentage will never be able to catch up on their payment deficits.

The pace of foreclosures was briefly slowed by loan modifications brought on by government programs. Alas, the programs have not been working as hoped. Half of the borrowers have been redefaulting within 12 months, even after monthly payments were cut by as much as 50 percent. The foreclosure pipeline remains completely clogged. As it unclogs, a new wave of homes will come on the market and precipitate additional downward pressure on prices. The number of foreclosed homes put on the market by banks will be a more powerful influence on the further decline of home prices than either consumer demand or interest rates.

A well-balanced housing market has a supply of about five to six months. These days the supply is more than double that, as inventory backlog has surged to about a 12½ months' supply this summer, up from 8.3 months in May. This explains why average sale prices have been declining for so many, many months. The high end of the market, in particular, is under great pressure.

The mortgage market doesn't help. It is virtually on life support from the government, which now guarantees about 95 percent of the mortgage market. The rare conventional lenders are now actually insisting on a substantial down payment and making other more stringent financial requirements. Household formation is also shrinking now, down to an annual rate of about 600,000, compared to net household formation during the bubble years, when it was in excess of a million annually. The most critical factor subduing the demand for housing is that home ownership is no longer seen as the great, long-term buildup in equity value it once was. So it is not too difficult to understand why demand for housing has declined and will not revive anytime soon.

This is a disturbing development for those who believe that housing is going to lead America to an economic recovery, as it did during the Great Depression and then through every recession since. Each time, residential construction preceded the recovery in the larger economy. This time, in the Great Recession, a lead weight on recovery has been the disappearance of some $6 trillion of home equity value, a loss that has had a devastating effect on consumer confidence, retirement savings, and current spending. Every further 1 percent decline in home prices today lowers household wealth by approximately $170 billion. For each dollar lost in housing wealth, the estimate is that consumption is lowered by 5 cents or 5 percent. Add to this the fact that we are building a million-plus fewer homes on an annual basis from the peak years of the housing boom. With five people or more working on each home, we have permanently lost over 5 million jobs in residential construction.

That is why housing was such an important generator of normal economic recoveries. To give this context, residential construction was 6.3 percent of GDP at its recent peak in 2005 and 2006. It has fallen to the level of 2.4 percent this year. This is significant if you recognize that a 3 percent top-to-bottom decline in real GDP constitutes a serious recession.

Government programs to stimulate housing sales have not helped. There have been eight of them. One, which expired most recently (in the spring), was an $8,000 tax credit for housing contracts. All of these have done little more than distort the pattern of housing demand and actually pulled forward hundreds of thousands of units at the expense of future growth.

There is no painless, quick fix for this catastrophe. The more the government tries to paper over the housing crisis, and prevent housing from seeking its own equilibrium value in real terms, the longer it will take to find out what is true market pricing and then be able to grow from there.

The sad fact is that housing problems never left the recession of the last several years and it doesn't look as if they are going to leave anytime soon. The ultimate solution remains the same as the solution to the country's broader economic crisis. That is, getting millions of people back to productive work.

I once told a professional real estate salesperson that she was wrong in saying that houses appreciate. At first she had a very condescending attitude, she was certain that I was a fool but I proceeded to prove to her that any increase in the value of a house and lot that was in excess of inflation ALWAYS represents an increase in the lot value, not the house itself. She wound up agreeing with me. Actually I could come up with a rare instance in which that would not be true but it would be a reach.

She was also dead set on the idea that buying a double wide mobile home was NEVER a good idea because the double wide depreciates while the site built house appreciates. I told her that if you bought and sold a site built house the way she was talking about buying and selling a double wide mobile home the double wide would come out being a far better investment. She wound up agreeing with me on that too.

Anyone who reads this report will understand exactly how this could happen and how Obama could get elected.

Americans’ Financial Capability by Annamarie Lusardi, February 2010

http://www.fcic.gov/hearings/pdfs/2010-0226-Lusardi.pdf

Basically, a country that is completely illiterate when it comes to finances and credit was given an unlimited amount of money to spend in the form of credit... and we did.

America went from $2.1 trillion in residential mortgage debt in 1990 to $11 trillion in 2007. That number increased BY $6 trillion in just 7 years from 2000 - 2007!

This doesn’t even start to take into account all of the unfunded retirements (at least $6 trillion too little saved), the unfunded pensions (trillions), bad commercial debt (trillions), bad municipal debt (trillions), public debt ($14 trillion) and the biggest monsters of all, unfunded liabilities for Social Security, Medicaid and Medicare (estimates of up to $200 trillion!!!).

We inherited a golden nation with a golden goose (industry) and we killed it.

We deserve the gov’t we’ve got and we deserve the economy we’ve got.

If anyone wanted to free market avail affordable houses, they’d make the local and state building codes illegal. Then we would have auto car size companies prefabbing houses. You would get a double wide, manufactured house, dropped on your foundation for 20K.

But then that would begin to cut out the Welfare State Plantation Corporation, so forget it.

>>Right. I hear you. Unemployment is our fault. Gee thanks.<<

Wrong crisis. I was writing of the so-called “housing” crisis — much of it could have been avoided or the pain reduced had people just used reasonable judgment.

>>I can’t hire myself, can I? Where on earth do you work that you can make such statements?<<

Actually, you can. It is called a “small business” and there are millions of them across America.

>>I bought my second house in 2000 (a modest, 1800 sq ft colonial), with about 10% down and have been paying a little extra on it for 10 years. I’m still easily $50000 underwater.<<

But does it matter? Your house provides the shelter you purchased, irrespective of the price of the next door neighbor’s house. The “underwater” is imaginary.

It matters to the extent that I’m stuck in a failing school district so I have to spend 9 grand a year on private school for my kids. And I’m stuck watching the local HS dropouts sell prescription drugs in the street in front of my house. And demographically there are people who are buying houses for 40 or 50 thousand dollars in my neighborhood that frankly are not in my social class and trash up the neighborhood. And any job opportunity that might require a move would force me into a short sale situation, or worse a foreclosure and all the hassle that goes with that. I get what you are saying, it’s a place to live with a payment I can afford and that it is just a loss on paper but it also restricts my mobility and freedom. And knowing it will stay like this for another 10 years or more is really frustrating.

>>I get what you are saying, it’s a place to live with a payment I can afford and that it is just a loss on paper but it also restricts my mobility and freedom.<<

I don’t know why I am doing such a bad job of getting my point across.

Yes, wanting to move and not being able to sucks. So does losing your job. There are many individuals who are adversely affected by being underwater.

But that isn’t a “crisis.” There are always things like this happening. During good times, there was unemployment too — ask the employees of Enron. And when housing prices were high and rising, people had to buy houses (or even rant) far away from their work and put up with lengthy commutes, sometimes not spending any time with their families at all. Sucky things happen to good and responsible people all the time.

The point is the so-called “crisis” 1) is not a crisis if people just pay their mortgage as agreed and not worry about the house value; and 2) the “crisis” as defined in the OP was created by a large number of people making stupid decisions, egged on by the liberal legislators.

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