How Foreclosure is Bringing Back the American Dream

Fewer than three years ago the American real estate market was at an all time high; the median home cost—$245,000—had not fallen in nominal or real dollars since 1991 and low average mortgage rates—around 6%—meant homeownership was possible for many first-time buyers whose comparatively low salaries made longer term mortgages necessary.

For the 70% of Americans who owned a home, increasing home values meant increased wealth—theoretically at least—and yet the average home equity of 46% meant Americans were actually owning a smaller percentage of their houses than ever.  Moreover, the median income of $44,000 meant Americans were also earning less, in comparison to the price of a home, than ever; for those who hadn’t yet achieved it, the American dream was on life support.

Last year, a 125% rise in the national foreclosure rate drove the median cost of a home down to $225,000, sending the ratio of average home prices to average incomes down to around 3.6 from a 2005 peak of nearly 4.0.  If the “American Dream” is indeed to own a home, and if high real estate prices were preventing people from realizing that dream, why has falling property prices sent Americans into panic?

The truth is, America’s 70% rate of homeownership—higher than that of Portugal, Denmark, France, Sweden, and the Netherlands—is partially the result of a culture that, for most of its existence, has put increased pressure on ownership as a sign of well-being and personal livelihood, even when “ownership” translates to possessing less than half of your home’s equity.  That the current drop in real estate prices is hurting a majority of Americans is a testament to the fact that the American Dream has largely been achieved.

And because it’s been achieved on such a large scale, widespread foreclosures are destroying retirement aspirations for many Americans.  Nonetheless, disappointed Americans ought to realize that it was the inflated price at which many of them bought their homes—and the heavy debt that came with the purchases—that pushed retirement so many years away; and what’s destroying their retirement plans now, is putting home ownership back within reach for others, and in doing so reversing a two-decade trend of growing domestic inequality.

If the recession worsens—and it likely will—foreclosures are going to continue to deflate real estate values.  For the majority of Americans that suggests a bad time to be selling a house.  For some who purchased their homes with very little money down—and probably shouldn’t have—that suggests the possibility of having  mortgages larger than the value of their houses.  For a new generation previously forced out of real estate markets, foreclosure represents the return of a dream.

-David Lamb

Related posts:

1. Mr. Keynes Finds a New Home: The exportation of American economic policy

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