The American Dream That Was: A Past Revisited

By: Art Javier

     Sometime in 2011 a hot news particularly in Yahoo, says that a new wave of foreclosures is coming for the coming year 2012. The thousands of inventory that banks have been holding on will now be adjudicated which will set a record far greater than the wave of foreclosures that happened in 2010. It seems that the American Dream has paled at that time to all of us.  Let us revisit the past wherein I wrote about these hard times.

 

I.                The American Dream

     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.

     However, during those hard times, millions of us whether U.S. citizens or immigrants, just shaked and scratched our heads that the above so called “American Dream” was a distant memory as we confronted the realities of the times. Millions and millions of Americans had to face the fact that their homes declined in devastating figures-big time. What seems perplexing to the average Joe, at that time, 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 was unemployed because of the debilitating and malignant recession that engulfed the entire economy. To add insult to injury, Joe could not find a new job - not only because the job market was likewise depressed- but he was 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 that very miserable market.

 

II.             New Home Sales

     It was reported at that time in US News and World Report, “new home sales, pending home sales and mortgage applications were 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 was a “given” that the fall in house prices ate up the equity that we had in our homes. We read reports that more than 11 million residential properties have mortgage balances that exceeded 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, noted at that time, that “home prices did fall by another 5% to 10%. This left an estimated 40% of all American homeowners with mortgages in excess of the value of their homes.

 

III.           The Disappearing Equity

     There is no denying the fact that the disappearing equity is an invite for strategic defaults. A lot of homeowners took the “Cash for Keys” deal, that is, mail or personally surrender the keys to their “friendly” lenders and just walked away even if they can afford to make the payments. But some refused to make any more payment and hanged in there. The banks did not 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. Did you guys knew why at that time a quarter of the people who have not made a single mortgage payment were still able to live in their houses for more than 2 years?  In fact, there were some unscrupulous people in Las Vegas and maybe in some areas, who had the audacity to rent out their houses which were already in a state of foreclosure. The naïve and poor renters were just caught in the middle and were forced to vacate the properties in a very untimely manner when the letters to foreclose from the lender started 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.

 

IV.           The Continuing Saga of Foreclosures 

     There was a report that stated, a staggering 8 million homes were in some state of delinquency, default or foreclosure. Alan Abelson of Baron’s reported, “that an additional 8 million more homeowners were 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 were vulnerable to further price declines.”

     Foreclosures may have slowed down a bit with the Home Affordable Modification Programs and other government efforts. But 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 wrote, “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 at that time a sick market and was deeply troubled. Conventional lenders were then asking for substantial down payments and were imposing very stringent financial requirements. More and more home sales were being conducted on cash basis transactions.

 

V.              Conclusion

     At the end of the day, what was the most critical factor that was subduing the demand for housing? Well, home ownership, which was once referred to as the great American Dream, became the great American nightmare. Mr. Zuckerman wrote that, “It was no longer seen as a great, long-term buildup in equity value.

 

     We were all witnesses to this collapse of the “American Dream” and thank God at this time we are now all awake from this very unpleasant nightmare. The market has corrected itself and we are out of this economic catastrophe. We continually look forward to a realistic price on our homes, as we revive the true epitome of the “American Dream” setting the correct equilibrium between supply and demand.