Last Updated: September 21, 2010 01:18pm ET

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Will the American Nightmare Ever Be Over?

By Sule Aygoren Carranza
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We’ve all heard of the so-called American Dream: homeownership. But given the state of things today, one could argue that for many homeowners, it’s become a nightmare.

Housing had been a good bet for much of the 20th Century. Government officials and the business community lauded housing as a good investment for Americans after World War II, when soldiers returned to US soil and new household formation began—and the American public bought in. It worked for years; families grew, generating demand for more housing, and home valued consistently appreciated, due in part to inflation, reasonable mortgage rates and beneficial tax policies.

And then the boom years hit. As this decade progressed, the mantra of “homeownership at all costs” pervaded the American mindset, largely due to government policy of promoting homeownership, declining interest rates and relaxed lending standards. Folks who bought homes as early as the mid- to late 1990s saw huge returns when they sold them a decade later.

Everyone and anyone, it seemed, who could secure a mortgage did so and paid high prices for houses, believing they would continue to appreciate. Existing homeowners also took advantage of mortgage rates and used their homes as ATMs, drawing money out for anything from home improvements and college tuition to vacations and plastic surgery. Meanwhile, lenders closed loan after loan, many of which were done through questionable underwriting criteria. It became almost expected to pay more than 30% of one’s income toward housing.

Then the financial crisis hit, triggered primarily by those same relaxed—and, some would say, irresponsible—lending standards. As rates on subprime loans went up, many borrowers faced default. Soon after, homeowners who took out traditional loans went pressure as the economy continued to weaken.

Simply put, the overinflated housing bubble finally popped.

Today, we’re a nation that has seen home values decline by some $6 trillion since 2005. In a New York Times article, Dean Baker, co-director of the Center for Economic and Policy Research, estimated that it would take 20 years to recoup that housing wealth. Even worse, the Times reported, after adjusting for inflation, values will never catch up. What was once a golden nest egg has now become, well, rotten. As crazy as he may be, I’ll channel Hugo Chavez here as I ask, “Can you smell the sulfur?”

A large portion of the borrower population is now underwater on their mortgages, with their homes worth significantly less than what they paid. Foreclosures are on the rise, except for those households lucky enough to get a loan modification—and that’s only if those measures work; there are several skeptics that believe even modified loans will eventually go into default. Neighborhood after neighborhood across the country are plagued by foreclosed on and abandoned homes, further bringing property values down.

Meanwhile, the Fed is frantically looking for ways to fix the broken system, scrutinizing the lending community and its practices. There’s even serious talk about disbanding or reorganizing the GSEs, which have long been the backbone of the housing finance market.

And those who are looking to sell their homes are finding it difficult, since they can’t get back what they paid, let alone what they owe on their mortgages. So they’re choosing to tough it out, at best, and, at worst, walk away if they need to relocate for personal or professional reasons. As an example, I have very close friends who had to relocate from New Jersey to another state due to the husband’s job. They haven’t been able to sell their NJ home for two years and could not find renters to cover their mortgage. After being unable to work out a deal with their bank—who basically told them they can’t get any help unless they defaulted on their mortgage—they were forced to just stop paying the loan on that NJ home, which remains on the market.

I know several others who, even though their homes are in short sale, can’t find buyers. And personally, if either my husband or I were to land a great job in another state, we wouldn’t be able to take it because we wouldn’t be able to sell out house for what we owe on it. Now, think about all those unemployed folks who have to decide between moving for a job opportunity or walking away from their homes and investment.

The lack of buyers out there is partly due to tighter lending standards, but there’s more to it: frankly, few people want to buy a home today. There’s mortgage and insurance issues, combined with the money that goes into simple maintenance of a home (do you know how much it costs these days to replace a broken water heater?!), and all of this makes homeownership even less attractive. And it isn’t like values, which are already low, are getting any better.

In fact, existing home sales fell 27% from June to June, exceeding economists’ expectations. At the same time, multifamily rental occupancies are improving across the board. It’s become clear that Americans are increasingly choosing to rent—both apartments and single-family housing—rather than own. Obviously, this is great news to those in the apartment market. But how long will this last?

When will homeownership, which has become a nightmare for many, regain its title as the American Dream? Or, will it ever?

(To search across all ALM blogs, go to www.Lexis.com.)

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Comments+ Add your comment

Posted by JSkelley

Sule --
I too read the NY Times story you mention. Very discouraging for those banking on their home as a dependable asset. However, I think other experts have different predictions, and that -- as always -- the location of a home is directly tied to its value, which better located neighborhoods still good investments in the long run.

September 07, 2010 at 01:56 PM EDT #
Posted by tom.scott@pobox.com

This to shall pass. I went through negative equity in Alaska in 1986-1990. I then went through negative equity in the early 1990s in San Diego. Survived both of them. In the first case, had to move out of state, but rented the house for positive cash flow and held until could sell. Started over in California, but have lived in the same house since 1991 and today stand at a 250% increase in value, 2.5% a year. It was 3% annual return at height of bubble. Slow but steady.

September 08, 2010 at 08:34 PM EDT #
Posted by JimR

S - I have owned 4 homes in my adult life - and I have never purchased one thinking it was an investment. A home is a place to live, period.

September 16, 2010 at 10:43 AM EDT #
Posted by david p

I agree, This to shall pass. Its a function of waiting for the bottom to be defined. A good indicator of that is when the collective psyche belivievs that it will never be as good as it once was. I think most people are convinced of that now. So we wait and look for signs of an upward trend.

September 16, 2010 at 01:28 PM EDT #
Posted by acoustic islander

When the American Dream of home ownership was out of reach for some of us, Barney Frank and Chris Dodd stepped forward to assure loans would be made to whose who otherwise could not and should not secure financing. Did anyone think that 100% LTV, no down, no proof of income, or other creative financing would not lead to trouble? So, here we are riding out the storm for the third year, even after the President and Congress "took the necessary steps to correct the problem" as our leader(s) said. Yes, this will end. The beginning of the end will start with the November elections. Next year the ship will slowly turn and head into smooth waters.

September 17, 2010 at 02:21 PM EDT #
Posted by Evan T

I am a long time residentiial, RE investor doing as a hobby at first. Bought and sold to date approximately 300 properties over last 20years. Noticed early on the people, the buyers likely had no business buying a home but the lenders were so slack. Great for me at the time. I now have (stuck with) 6 properties around DFW, thats 6 mortgages, 6 insurances, 6 utility bills and 6 taxes bla bla. I bought them for 50 cents on the dollar, great deal right, wrong...Can't give them away. Seriously, No buyers just like you said. Dallas area hasn't taken the hit like many other cities, but it's still very bad here.

September 20, 2010 at 01:31 PM EDT #

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