The American Dream of Home Ownership Has Become a Nightmare

Why has housing been such a core element in the story of American civilization?

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.

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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. 

• Read more of Mort Zuckerman's columns
• Check out a roundup of editorial cartoons on the economy.
• See which members of Congress get the most campaign donations from the home builders industry.
• Become a political insider: Subscribe to U.S. News Weekly, our digital magazine.

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