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Homes Still Cost Too Much

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You would think with home prices still dropping like hailstones in most areas, that homes would be bargains.

The present buyer's market obscures a key fact about the housing crisis though: millions sought the refuge of cheap credit, subprime and adjustable loans during the boom because they were the easiest routes to homeownership in a time when house prices far outpaced income growth.

The sad fact is that the Great American Dream is still out of reach for far too many and it was the declining affordability of decent houses that was one of the triggers of the housing bust.

It's not that home prices haven't plummeted as banks unload foreclosed homes at fire-sale prices. The national median home price fell to $169,000 in the first quarter, according to the National Association of Realtors. Bank-owned properties are selling at 20 percent to 50 percent discounts.

"Contrary to popular belief," says Jeffrey Lubell, executive director of the Center for Housing Policy, "the recent decline in home prices has not resolved the nation's housing affordability problem."

Homes cost too much even before the bubble, so home buyers were willing to do anything to get into the domicile of their dreams. After all, homeownership is an American birthright, or at least that promise was sold to Americans starting in 1946. "Buy as much house as you can afford!" That's what the bankers and real estate agents were telling us for generations because of generous tax breaks and easy, often government-guaranteed financing.

Unfortunately the cost of land, homebuilding, taxes and homeownership far exceed what millions of households are able to cover with nearly stagnant personal income growth in this century. Inflation simply ate away at wages that just weren't enough to pay ever-rising bills for property taxes, maintenance, health care, education and energy.

Even at the height of the boom, Harvard researchers at their Joint Center for Housing Studies found that almost 18 million households were paying more than half of their incomes for housing (about one-third is considered reasonable). They were also hit hard by rising energy costs, which rose twice as fast as total spending from 2004-2006.

That wasn't always the best advice. The Harvard group last year found that "nowhere in America does a full-time minimum wage job cover the cost of a modest two-bedroom rental at 30 percent of income." Those stranded in the low-wage service economy, left behind by the technological revolution of the 1990s, could barely afford to rent a decent place in most cities, much less buy.

Those families who are paying more than half of their budget for housing have little to nothing left over for healthcare, food, clothing and education. That hurts more than 14 million children living in low-income households, whose families had less than $600 per month on average for other essential expenses.

So was anyone surprised when brokers and subprime lenders targeted minority and low-to middle-income neighborhoods then walked away when they sold trillions of these mortgages to Wall Street and the largest banks? They were selling the American Dream!

From sparkling new suburbs in the Sun Belt to inner cities, cheap money and neutron-bomb adjustable loans meant nobody had to be house poor -- at least for a year or two. Then the explosion hit and we're still feeling the aftershocks.

Further exacerbating the affordability crisis was the tendency for municipalities to favor upscale, sprawling home developments over middle- and low-income housing. Since home values are directly fueling property tax income in most places, nearly every community can get more money for schools and public services. When you base property tax revenue on home valuations, bigger price tags translate into better-equipped schools, fire stations and libraries.

Yet building McMansion subdivisions only inflated the housing bubble and reduced the stock of affordable homes. From 2002-2005, home prices soared 45 percent in areas restricted to upscale building, versus 24 percent in unrestricted areas. Moreover, by creating these "spurbs," sprawling urban areas unconnected to transportation and city centers except by endless highways, homeowners' costs rose to catch up with needed infrastructure, schools and other public services.

The housing crisis has given us a rare opportunity to re-evaluate and re-invent the American Dream. As I note in my new book The Cul-de-Sac Syndrome, if we're to increase the homeownership rate, government will have to create incentives to build more affordable housing.

We'll also have to find a way to de-link property taxes from funding local services to reduce the number of overpriced homes in a handful of areas. Perhaps even eliminating tax breaks for mortgage interest would keep prices at realistic levels because you wouldn't be subsidizing ever-larger mortgages.

Ultimately, though, the American home and community will have to be re-invented. Houses will need to be ultra-energy efficient to reduce long-term ownership costs and even produce their own energy. This can be done with factory-built, green homes.

Then we'll have to build -- or re-build -- high density, walkable communities that are close to jobs and retail outlets. This is already happening throughout the U.S., although building and zoning codes need to change to allow this to happen on a large scale. Even more federal incentives are needed for green building.

We've just experienced a great teaching moment in history. The American Dream as we know it was not sustainable. Now we have the chance to make it affordable, ecologically sound and socially beneficial. It's a rare opportunity.

©2009 John F. Wasik, author of Cul-de-Sac Syndrome: Turning Around the Unsustainable American Dream