The end of white picket fences

Wanda Rapp is living the American Dream. She has a patio for grilling, a pool outside her front door and a huge recreation room for parties. She lives in a condominium and doesn't have to worry about mowing the lawn or cleaning the pool.


Wanda Rapp doesn’t own her home, and doesn’t want to. Her job makes her painfully aware of why she doesn’t. Rapp manages repossessed and foreclosed assets for a bank in Los Angeles. Assets. Not homes where families once lived. Not offices where people made their livelihoods. Just assets to be counted and accounted.

“My American Dream is not, and really never has been, home ownership. I’m pretty sure that if I had bought a home, I would have already lost it to foreclosure, even though I have been in the real estate business for 20 years,” Rapp said. “It’s my personality; I would have mortgaged it to the hilt!”

Julia P. Farris, a legal assistant for a law firm in Nashville, Tenn., is trying to get out from under the American Dream.

“I say all the time that owning real estate for us is not a blessing,” Farris said. “My husband and I have struggled through three job losses, going back to school, age discrimination in trying to find a job, and keeping our mortgage paid. Although we own our home, (or are trying to own it,) we have been unable to properly keep it up. It is slowly deteriorating, much to my distress. There’s nothing to be done for it–there’s just no money left at the end of the month to even save toward it.” Farris said.

Rapp and Farris are at one end of the spectrum of Americans most familiar with the impact from the huge run up in commercial and residential property values four to six years ago, and the huge debt incurred to acquire or refinance those properties that ultimately brought on the Great Recession.

A castle, not a bank account
Historically, shelter has been one of the most basic of human needs, providing protection from the elements and a secure place for one’s belongings. In the years leading up to 2007 for more and more people, shelter became a savings account, a retirement plan or worse yet, a spending account.

And that concept of “having a place to live that is ‘mine, and mine only,’ is usually the first step taken in the path to wealth creation,” says Doug Rittermann, a senior associate with ECP Commercial in San Diego, Calif. “It provides an important building block psychologically, practically, and economically, to achieve more.”

“During the boom years of the past decade, the American Dream was distorted by easy credit to where it meant having a great big house with two expensive SUVs, and a vacation home, as everyone ‘one-upped.’ People lost sight of what truly is important,” Ritterman said. “Now folks are starting to realize that having a fancy home and fancy toys doesn’t mean much when you are teetering on the edge of financial ruin. And buying these things with dangerous amounts of debt doesn’t create much of a sense of achievement either.

Stephen P. Bye, executive vice president and senior managing director at NorthMarq Capital in Centennial, Colo., worked in the risk management area for a large mortgage insurance company back in the mid-1970s.

“Back then, we triple-checked everything regarding employment verification, salary, source of down-payments, appraisal values, etc.,” Bye recalled. “Of course, that was prior to securitization, when portfolio lenders were the originators, while Fannie Mae or Freddie Mac were the only investors for mortgages. It’s hard to fathom how things changed over the next 30 years. In the end, homeowners actually became speculators.”

Securitization is often singled out as a key component of what went awry leading up to 2007. Mortgages were bundled into billion-dollar pools, turned into bonds and sold on Wall Street. Risk was spread across many different investors and around the world, in the belief that packaging and spreading the risk would contain the downside to an acceptable level of default.

However, the real fault lies not so much in securitization, which provided an efficient and valuable secondary market for mortgage money, but rather with a more basic root cause–greed. Ultimately, the temptation to make more money resulted in the almost complete absence of requirements and the acceptance of greater and greater risk, and in some cases outright fraud, to meet demand.

Debt is debt and risk is risk and that combination was the ultimate reckoning that awoke the country from American Dream to own a home. By some reliable estimates, one in four homeowners is underwater on their mortgages. They owe more than the real estate is worth.

And the Great Recession has deepened the divide between either ends of the spectrum.

“America’s middle class hasn’t been living beyond its means. Its means haven’t grown even though the economy has. The dollars went to the top instead,” tweeted former U.S. Secretary of Labor Robert Reich, now a University of California at Berkeley professor and author of the upcoming book, Aftershock.

“When $7 trillion is sucked out of the system and ends up who knows where, it is going to dash a lot of dreams, whether they involve real estate, stocks or retirement pensions,” said William Crowe, president of Regent Asset Management Inc. in Honolulu, Hawaii.

Rethinking the American Dream
The suffering and losses stemming from the Great Recession have prompted a rethinking of whether homeownership was ever Americans’ shared dream, or rather was a vision sold to Americans since the Great Depression of the late 1930s.

Founded in 1938 as The National Mortgage Association of Washington, today’s Fannie Mae (the Federal National Mortgage Association) was chartered to provide a financial boost to the nation’s depressed housing market. It evolved over the years to begin buying and selling loans guaranteed by the Veterans Administration, then by other government-sponsored mortgage enterprises (GSE), and finally to conventional mortgages. It purchased mortgages from lenders, returning money to the lenders to be loaned to another borrower. The enterprise proved very successfuly, ultimately stoking one of the greatest housing building booms in history.

Fannie Mae makes no bones about its mission: “At Fannie Mae, we are in the American Dream business. Our mission is to tear down barriers, lower costs, and increase the opportunities for homeownership and affordable rental housing for all Americans. Because having a safe place to call home strengthens families, communities, and our nation as a whole,” its Web site proclaims.

But Fannie Mae may well also fall victim to the Great Recession. Congressional efforts have been launched this year to overhaul Fannie Mae and other GSE firms. Even the National Association of Realtors concedes that “Fannie Mae and Freddie Mac are going away.” However, the NAR advocates that key elements of their role must remain in order for the U.S. to have an efficient and affordable reformed mortgage finance system.

The National Multi Housing Council and the National Apartment Association recently produced a new pro-apartment ad with the theme “Sometimes Living the Dream Means Rethinking It.”

The ad uses visuals contrasting suburban sprawl with a pedestrian-friendly apartment community to show how the American Dream is changing as a result of changing demographics and a new consumer thinking following the single-family bust.

No dream, a new dream or the same old dream?
“There is no American ‘dream’ at this time,” says Art Bruzzone, president of BSI Capital Group in San Francisco. “Pensions are struggling to compensate for losses in the stock market and real estate. Pensions are Americans’ primary retirement ‘dream.’ And without equity lines, and with the underwater state of homes in America, Americans cannot feel as optimistic as prior to 2007.”

“If the American Dream is something else, I’m not quite sure what it is. If anything, the new American Dream is to actually have equity in their home vs. owning an “asset” that has more debt that the underlying value,” says Marty Busekrus, senior sales associate with CB Richard Ellis/ Capital Markets in Boca Raton, Fla.

It’s not at all clear whether the American Dream of yore remains relevant today, or whether it has been supplanted. Some said the American Dream is a quality of life: peace, stability and family. Some said it is freedom: freedom to move or choose your own destiny. For others it was more self determination: to make ourselves and be in charge of our own destiny. For others, it was a storehouse of wealth.

“I believe that the ‘American Dream’ is currently much more focused on personal financial security rather than owning some chunk of real estate. With the job market being stagnant and appearing to be entrenched in that situation for years to come, the average American needs to have flexibility on where they will live,” says Brian Whisnand, president of Henry S. Miller Realty Management in Dallas.

“Our economy is afraid,” Whisnand says. “Baby boomers are worried to death about having enough money to retire and can no longer count on savings or appreciation in their real estate holdings to close the gap between what we have lost in retirement funds. Owning a home is no longer the ‘American Dream.’ Having a safe and secure job with the ability to save money for future retirement is and should be the new American Dream.”

Fred B. Cordova, III, senior vice president/Western Regional Director of Colliers International in Los Angeles, says: “I have always felt that the ‘American Dream’ is having freedom of choice to pursue happiness. It is ‘choice’ with all its craziness, randomness, complexity and simplicity that so often determines who we are and what we become, in effect, our destiny.”

“Real estate ownership, which for most people is owning a home, was and for many still is, an aspiration that ostensibly engenders that sense of freedom of choice over ones domain,” Cordova says. “I believe that with the development of the Internet into a social construct that allows for the same freedom of choice to pursue one’s happiness and the manic morphing of home ownership into an oppressive financial jail that restricts choice in so many ways, many people who are comfortable in “cyberspace” will lose their desire for real estate as a euphemism for the ‘American Dream.”

Times have changed, says J. Francis Mahoney, director of Cushman & Wakefield of Pa., Inc. in Philadelphia.

“For us baby boomers, home ownership was the all-important first step toward being an adult, right up there with marriage and having kids. I am sure my generation still feels that way,” Mahoney says. “However my children’s generation may have different feelings. Young adults today value freedom and mobility much more than we did. They switch jobs and locations frequently, travel the world with little fanfare and do business globally. They get married later and for shorter periods. Roots are not as important as they used to be. Owning real estate is not necessarily a bad investment. It just might not suit the lifestyle of today’s younger population.”

Too ingrained to go away
In all of our conversations with real estate professionals, there was no getting over the fact that real estate and the American Dream are irrevocably attached. No matter whether it evolves or is supplanted, real estate seems likely be forever attached to success and accomplishment for Americans.

“Optimism springs eternal in America and I believe the great majority of Americans still believe owning a home is highly desirable,” says Paul Spurgeon, president of Nations Media Partners in Kansas City, Mo. “And they will get a return on their investment, if only from this point forward after the market has just been ‘reset.’ If I am correct, then the supply-demand inequality will be rectified and home appreciation from this point forward will be a welcome result of this self-fulfilling prophecy.”

Says Alan Burns, a vice president at Old National Bank in Indianapolis, Ind.: “I hope the ‘Dream’ was never about the real estate but the quality of life, security and comfort symbolized by a home. If the real estate was the ‘Dream,’ it explains how we got into this problem of oversupply and overpaid fueled by the aggressive financing allowing people to not buy real estate–but in fact–buy financing (sometimes beyond their means).”

“The ‘Dream’ should be the quality of life, security and comfort in a home with appreciation achieved by both some market appreciation (after the over and under supply of markets along with upkeep, etc.) plus from equity build-up through amortization or even payoff of debt,” Burns says.

“Is real estate a bad investment,” asks Paul Licausi, president of LS Commercial Real Estate in Overland Park, Kan. “No. It will continue to be the largest and best investment for the average consumer (that is those who can afford home ownership on a go forward basis) if we can keep the government out of the game. An investment in a home will allow for equity growth over a long period of time, which is how the system is suppose to work.”

“I believe the American Dream is having a great place to call home, however, owning it may not always be part of that dream,” says Tom Skobo, a commercial real estate broker for Brounell & Kramer Realtors in Union, N.J. “I think people are beginning to realize that the large amount of cash required to own and maintain a primary residence can be better invested elsewhere and the return on that investment could help pay for a very nice rental property to call home without the downside risk homeownership carries in many markets.”

Tweets Jon Morgan, director of acquisitions for Morgan Properties, a multifamily investment firm in King of Prussia, Pa.: “The American Dream was redefined. No more white picket fences in suburbia. Now it’s rags to renting to riches.”

Even if American society moves away from buying a home to renting, they will, like Wanda Rapp, continue living “in” the American Dream; they just may not be able to afford it, may not want to own it or may want to move from place to place.

Author: Mark Heschmeyer, CoStar Group