Middle-class homeownership dream may be slipping away

One thing most middle-class families have always had in common is a belief in the American dream: homeownership.

But the housing crash and Great Recession dashed that dream for many, and shook to its core the idea that homeownership is a defining element of the middle-class lifestyle.

For generations, the financial stability of middle-class families has been intertwined with the financial benefits of owning a home.

Homes have long served as an automatic savings plan - pay the mortgage every month and see the savings grow as equity. They have been a tax haven - the interest is deductible. And they have been a retirement plan for many - pay down a 30-year mortgage and retire free and clear, or sell the house and live off the accrued wealth.

The American dream of homeownership has been evolving since just after World War II, when the middle class started to grow and mortgages became more available. Families typically lived in homes and paid them off. But in the 1970s, as home values began to steadily climb, the dream evolved. Families sold their first homes, made a profit and moved up to nicer ones, sometimes time and again. Always, steady growth in home values helped pave the way to financial security.

For many people, the housing crash unraveled that idea. Risky mortgages or job losses led to foreclosure for some. Plummeting home values left many more with a mortgage to pay but no equity.

"This housing crash is different than any one the country has experienced before," said Arizona economist Lee McPheters. "Some people who would be considered the middle of the middle class have lost homes to foreclosure."

One other thing that has changed, he said, is the way the crash changed the middle-class view of the future.

"Younger people who have the potential to become the next wave of homebuyers and middle class are seeing this," he said, "and rethinking what homeownership means."

Arizona dream

In Arizona, affordable home prices and decades of steady housing appreciation from the 1950s until the beginning of the area's housing boom in 2004 made the American dream easily attainable for many households.

People moved from California, the East and the more-expensive parts of the Midwest to metro Phoenix. The American dream meant homeownership; the Arizona dream meant a home that was easy to afford, a new home, one with a swimming pool near new shopping centers and jobs.

"The ability for people earning a regular income to afford a home of their own was long a big draw for people moving to Arizona," said Ioanna Morfessis, founding chief executive of the Greater Phoenix Economic Council and an economic-development consultant.

In 2000, the median price of a metro Phoenix existing home was $129,000. Borrowers earning the area's median household income of $46,000 could easily afford the payment, even with interest rates around 7 percent.

Arizona State University annually calculates the region's housing "affordability index." In 2000, the index was 117 percent, meaning a household earning the region's typical income made 17 percent more than what was needed to afford a median-priced home.

In cities like New York, San Francisco and Los Angeles, the affordability index was well below 50 percent in 2000 and rapidly falling.

Affordability was the key to the Arizona dream, Morfessis said.

"Affordable homes drew both workers and companies," she said, "and helped build the state's middle class."

But it all fell apart when housing prices began to far outpace income gains, she said.

The affordability index for an existing Phoenix home fell to an all-time low of 74 at the height of the boom in 2006.

Not long afterward, buyers began falling into foreclosure.

"Now, due to the housing crash, we have a group of disgruntled homeowners who were once the backbone of Phoenix's middle class," Morfessis said. "And a growing group of renters who no longer believe owning a home is part of the American dream."

Census data shows the percentage of occupied homes in Arizona owned by the people living in them declined from 74.7 percent in 2000 to 66 percent in 2010.

The U.S. homeownership rate declined 1.1 percentage points from 2000 to 2010, to 65.1 percent. That's the biggest national decline in homeownership since the Great Depression.

Stuck in the middle

John Kaminsky said the decision to buy a home in Arizona ruined the American dream for him. The 44-year-old and his family moved from New York to north Phoenix in 2005, near the height of the boom.

He and his wife bought a house, counting on its appreciation to pay for their children's education.

He said he regrets that decision every day.

"I bought a home we could afford, but now it's worth 50 percent less," he said. "My neighbors have all walked away or leased their homes out to renters. My kids are grown, and we are stuck."

He and his wife both work and can afford their mortgage but are concerned about college costs for the children as well as what the rising number of foreclosures in his neighborhood will continue to do to his home's value.

The middle class, particularly in metro Phoenix, took a big hit with the housing crash.

Many homeowners who had conservative mortgages lost jobs and couldn't afford their homes anymore. In some cases, if one income of a two-income household declined or went away, it was enough to put the family behind on their payments.

And like many other homeowners, they couldn't sell to pay off those mortgages. Home values have plummeted more than 60 percent since 2006, so many borrowers owe far more than their homes are worth.

A federal housing program, announced by President Barack Obama in Mesa in 2009, was supposed to help many middle-class borrowers refinance or modify their mortgages. But lenders were reluctant to participate, and the program is now winding down after helping about 30,000 metro Phoenix homeowners avoid foreclosure.

In the same time period, banks have foreclosed on almost 100,000 homes.

Heather Pierce, a managing partner with a marketing group, paid a law firm to negotiate with her lender in hopes of avoiding foreclosure.

"I very much regret buying my house in Phoenix. I owe $150,000 more than it is worth," she said.

She and her husband are in their mid-30s and moved to Flagstaff a few months ago because he found a job there. He had lost a job as a foreman for a contractor in Phoenix. She lost her job in the marketing department of a large health-care firm last March.

"We are done with it and are going to walk," she said.

She said their lender won't work with them on a modification and has not foreclosed, which is not allowing them to move on.

Nationally, adults ages 35 to 64 are at their lowest levels of homeownership in 15 years. About 72.5 percent of this group own homes now, compared with 75 percent a few years ago.

Bad decisions

For some, the homeownership dream came into reach because of the same ill-fated moves that helped cause the crash.

During the housing boom, subprime loans and mortgages requiring very small down payments allowed too many people to reach well beyond their means to buy homes - they believed the middle-class dream was closer than it really was.

Many of those borrowers were the first to lose their houses to foreclosure in the Phoenix area.

Other metro Phoenix homeowners refinanced or took out home-equity loans to buy new cars or boats or to take vacations, believing their homes' prices would keep rising - as if the middle-class dream had become an upper-class reality.

"It's now all too obvious that not everyone who bought homes during the boom should have bought," said Arizona Housing Department Director Michael Trailor. "It's also clear too many people used their home as a credit card."

The Housing Department and most Arizona non-profit housing agencies used to work mainly with low-income residents trying to find housing they can afford, but now most of their efforts are going into helping middle-class homeowners keep their houses or find affordable rentals if they are foreclosed on.

Lifetime renters

As the housing slump drags on, homeownership itself has become less common.

The number of renters in Arizona is growing, fueled by people who lose homes to foreclosure. And even many people who can afford to buy are opting to rent.

Elizabeth Rehner moved to Tempe after graduating from college in California a few years ago. She sees the great deals for homes but has no intention of buying.

"Like a lot of my friends, owning a home does not appeal to me. I may never buy," said Rehner, who is 28. "It's not just because I might move around for my job. I just don't trust the housing market. My parents are facing foreclosure, and they paid their mortgage every month for years. They can't sell."

Rehner said she doesn't want to be in a position like her parents, ever, and she doesn't trust lenders. She rents a three-bedroom house in Tempe for less than $1,000 a month.

Before the boom, the region's affordability rating was already considered high at 115 percent. Now, the rating is a record 163, because of lower home prices and interest rates, but that's still not enough to draw many buyers.

"Homeownership used to be the goal. Now it's keeping people in decent rentals or from being homeless," said Rebecca Flanagan, the longtime Arizona director of the U.S. Department of Housing and Urban Development, who retired last month. "We all hope the cycle will turn around and more people will want to own again."

No regrets

Despite metro Phoenix's housing crash, there are still many middle-class families happy to own homes.

"The merits of homeownership are taking a hit now, but ultimately I think people will come back around to the benefits of having a safe and stable place of their own," said Fred Karnas, former director of the Arizona Housing Department, who most recently was a senior adviser with HUD in Washington, D.C.

Dennis Sanderson purchased his Queen Creek home in 2006. He and his wife chose the lot, the amenities and watched with "glee" during the eight months it took to build. The couple moved from a condominium in Scottsdale to the four-bedroom, 1,900-square-foot home.

"The housing bubble burst a year after we moved in, and suddenly the $220,000 house we bought was worth half that much," he said. "While we are not thrilled with that huge loss of value, we can live with it and plan to be here at least 10 years or more."

Most homeowners who bought during the boom will likely have to wait at least 10 years to see their values rebound. But housing advocates say for people to be happy and own a home, they must stop focusing so much on the values.

"Almost everyone has lost money on a house," Karnas said. "We have to move on."

by Catherine Reagor The Arizona Republic Oct. 16, 2011 12:00 AM




Middle-class homeownership dream may be slipping away