With every new story about the housing crisis, a piece of the American dream fades into dust.
Foreclosed properties sold on the courthouse steps in Atlanta don't attract enough buyers. California homeowners awaiting foreclosure neither pay their mortgage nor any rent; they are squatters in a property they hoped to own but are now stuck in a financial purgatory. Former homeowners with no equity left in their homes in Phoenix and Las Vegas simply walk away. Entire developed blocks in South Florida lie vacant.
Although they represent a small part of the population, the travails of housing victims impact us all. Home prices across the country keep falling in a market without a bottom. One foreclosure depresses values in an entire neighborhood. Buyers stay away because they are waiting for better bargains. The only guarantee is that some opportunistic capitalists will pick up the scraps and continue to make money as we watch our home equity evaporate.
There is no safety net to stop this free fall in our aspirations and nest eggs. Exposed to the cruel hand of market risk, our 401(k)s were pummeled during the dot.com meltdown and drained even more last year during the credit crisis. Guaranteed defined-benefit pensions have gone the way of cellphones without cameras. The only guaranteed, inflation-indexed payment for our golden years is Social Security -- and even that's under attack and fiscally endangered. Health insurance costs more every year, even if your employer provides it. No job outside of government seems secure. No wonder Americans turned to real estate to prop up their eviscerated wealth. The social contract was in tatters.
Can we still afford the American Dream in a market economy? Homes cost too much for a large swath of the U.S. population even before the housing bubble, so it was not surprising that home buyers were willing to do anything to get into the domicile of their dreams during the bubble years.
After all, isn't homeownership an American birthright in which bankers, real estate agents and mortgage brokers exhorted us to "buy as much house as we could afford?" That lust for leverage led millions astray.
Even at the height of the boom, researchers from the Harvard 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. An estimated 12 million renters and homeowners now pay more than half of their income for housing. That's too much.
Families who are paying more than half of their budget for housing have little to nothing left over for health care, 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.
Overspending on home ownership expenses took a huge social toll, especially in an economic environment with little or no wage growth.
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.
The housing meltdown is also devastating state and local budgets and spending on public services. By law, states must balance their budgets. Most won't be able to without further cutting services and raising taxes. That means the age of abundance -- building new schools, parks, libraries and other public amenities -- may be over for now. An entire generation will be impaired by this calamity.
Falling home values worsens the malaise. According to The New York Times, a record number of homeowners are appealing the assessed values of their homes. Market values have plummeted from 20 to 50 percent, yet they are being taxed at valuations reached at the height of the bubble. A lion's share of taxpayers will win, although public agencies and schools will continue to lose because of the reduced revenue from property taxes: It's time to re-evaluate linking the bulk of income for local services to local real-estate levies.
Since few, if any, have ever experienced a full-blown housing depression, state and local governments have never had to deal with this dramatic loss of revenue. Despite the fiscal band-aid of the $787 billion federal stimulus package, teachers will still lose their jobs, programs will be cut and public facilities across the board will not be built. To date, some 41 states have slashed state worker jobs and benefits; 24 have pared public school aid and 23 have cut programs for the elderly and disabled, according to the Center for Budget and Policy Priorities.
This downward spiral will not end soon as Congress and the Obama Administration have not acted aggressively enough to stop foreclosures, which causes prices to fall even more.
One potential remedy to stem foreclosures -- allowing homeowners to write down mortgage principal in bankruptcy -- was shot down in the Senate after furious lobbying by the financial services industry. In Washington, the banks still seem to be calling the shots behind the scenes, even at the expense of losing even more customers and prolonging the downturn.
Let's offer those facing foreclosure a chance to rent their homes and build some equity. The current government program designed to modify unaffordable loans is a travesty. Lenders have little incentive to keep people in houses; there's absolutely no profit in keeping them in properties in a sinking market in which the owners have no economic stake. For new buyers and the secondary market that buys and invests in mortgages, let's provide a temporary iron-clad, full-faith-and credit guarantees on mortgages for those who've made down payments.
The housing crisis has given us a rare opportunity to re-evaluate home ownership. As I note in my new book The Cul-de-Sac Syndrome, if we're to rescue the American Dream, government will have to create incentives to build more affordable housing in addition to lowering medical expenses through universal coverage. The need for these changes is immediate, but won't happen until foreclosures are stopped and home prices stabilize.
Let's start with a massive program to build decent, affordable and green housing. I'm not talking about dehumanizing public housing projects, but providing grants to private builders to make homes that are energy-efficient and produce their own power in human-scale, walkable communities. Provide some healthy tax credits for those who build on vacant lots or who tear down abandoned buildings. The most-generous breaks should go to those builders who work in the most distressed urban areas and create the most energy-stingy houses.
As Congress and the Obama Administration ponder another stimulus package as the jobless rate rises, let's start with rebuilding the cities. Chicago, for example, has some 80,000 vacant lots. New Orleans still has about 12,000 homeless. Instead of providing subsidies to build far-out suburban wastelands -- I call them "spurbs" -- let's revive inner cities and suburbs.
The American Dream as we know it was not sustainable. A new American Dream can be affordable, ecologically sound and socially beneficial. The price of this vision isn't cheap, but we can't afford to watch our dreams go up in smoke.
©2009 John F. Wasik, author of The Cul-de-Sac Syndrome: Turning Around the Unsustainable American Dream
John F. Wasik, author of The Cul-de-Sac Syndrome: Turning Around the Unsustainable American Dream, is a personal finance columnist for Bloomberg News and the author of several books. His most recent book, The Merchant of Power, was praised by Studs Terkel and well reviewed by the New York Times. Wasik has won more than fifteen awards for consumer journalism including the 2008 Lisagor and several from the National Press Club. He has appeared on such national media as NBC, NPR, and PBS. He lives in Chicago.
For more information please visit www.johnwasik.com and www.culdesacsyndrome.com
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