The American Dream..That Was....

                  Originally published in the CA and NV Examiner on 11/12/2010 issue

     It used to be that owning your home was a hallmark for one to be identified as belonging to the middle class American family life. The fulfillment of home ownership is in fact the fulfillment of the “American Dream.” With the rest of the US citizenry, we too, the immigrants who came to this country shared the thought of home ownership as a symbol of the American Dream. Being able to provide a decent house gave our families not only a secured shelter but also for our young to have access to a good public education.  The financial aspects of a home are equally important since it became a strong speculative store of value to protect us- whether we originally intended it to be our long-term abode or as an investment or retirement asset in our sunset years.

     Today, millions of us whether U.S. citizens or immigrants, just shake and scratch our heads that the above so called “American Dream” is now a distant memory as we confront the realities of the times. Millions and millions of Americans have to face the fact that their homes declined in devastating figures-big time. What seems perplexing to the average Joe, is that, not only must he tackle the pressure of making his mortgage payment on a house that has lost its value- but he also lost his job and is now unemployed because of the debilitating and malignant recession that engulfed the entire economy. To add insult to injury, Joe cannot find a new job - not only because the job market is likewise depressed- but he is now faced with a very low credit score spawned mainly by his inability to make timely payments on his mortgage. Joe cannot recoup what he has put in his house and he cannot get out of his obligation since he cannot re-sell in this very miserable market.

     As reported by Mr. Zuckerman of US News and World Report, “new home sales, pending home sales and mortgage applications are down to a 13 year low despite the fact that long term mortgage rates have plummeted to an average of 4%. New home prices have fallen to about 30% to 40%.”

     It is a “given” that the fall in house prices will eat up the equity that we have in our homes. I have read reports that 11 million residential properties have mortgage balances that exceed the homes’ values. “And given the total inventory of homes and the shadow inventory of an additional 3.7 million empty (foreclosed) homes,” David Rosenberg, Chief Economist of Gluskin Sheff, notes that “home prices will still fall by another 5% to 10%. This would now leave an estimated 40% of all American homeowners with mortgages in excess of the value of their homes.”

     There is no denying the fact that the disappearing equity is an invite for strategic defaults. A lot of homeowners will take the “Cash for Keys” deal, that is, mail or personally surrender the keys to their “friendly” lenders and just walk away even if they can afford to make the payments. But some will just refuse to make any more payment and hang in there. The banks won’t take these deflated properties onto their books because they will then have to declare a financial loss- over and above the fact that they still have to worry about maintaining these properties. So, my dear readers, do you know now why a quarter of the people who have not made a single mortgage payment are still able to live in their houses for more than 2 years?  In fact, there are some unscrupulous people in Las Vegas and maybe in some areas, who have the audacity to rent out their houses which are already in a state of foreclosure. The naïve and poor renters are just caught in the middle and are forced to vacate the properties in a very untimely manner when the letters to foreclose from the lender start to come in.  So where did this ex-homeowner turned Landlord go after all these happened?  “Man, he’s gone…he’s nowhere to find.” He’s probably in Timbuktu, having a good time and spending your hard-earned money.  

     There is a report that states “a staggering 8 million homes are currently in some state of delinquency, default or foreclosure.” Alan Abelson of Baron’s reports, “ that an additional 8 million more homeowners are estimated to have mortgages representing 95% or more of the value of their homes leaving them with 5% or less equity in their homes, and thus vulnerable to further price declines.”

     Foreclosures may have slowed down a bit with the Home Affordable Modification Programs and other government efforts. But as I have already stated in a previous article of this column that these programs have not worked as hoped since more than 50% re-defaulted within 6 to 12 months, after modification, even after their monthly payments were cut by as much as 50%.

     Mr. Zuckerman writes, “While the foreclosure pipeline remains clogged, as it unclogs, a new wave of homes will wash into 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.”  

     As I have also written in my past article, the mortgage finance was a sick market and today is still deeply troubled. Conventional lenders are now asking for substantial down payments and are imposing very stringent financial requirements. More and more home sales are now being conducted on cash basis transactions.

     At the end of the day, what is the most critical factor that is subduing the demand for housing? Well, home ownership, which was once referred to as the great American Dream, is now the great American nightmare. Mr. Zuckerman writes that, “It is no longer seen as a great, long term buildup in equity value. It will not be difficult for one to understand why the demand for housing has declined and will not revive anytime soon.”

     In conclusion, I would say that there is no immediate panacea that will solve this catastrophe. The more the government tries to interfere with the housing crisis the longer it will take time for the market to correct itself and the longer it will take for the realistic price to find the equilibrium between supply and demand.