The Death of the American Dream

The news from the housing market this week is bad. Really bad. House prices today are lower in most of the country than they were in the dismal month of April 2009; we are now in the second dip of the double dip housing downturn [..].

For eighty years we have defined the American dream as an owner occupied family home, preferably with a nice swathe of crabgrass-free lawn around it. The home mortgage was the centerpiece of a society of consumers based on debt-financed living. It was life on the installment plan. The latest downturn in the housing market is one more grim signal that in its current form, the American Dream is going the way of the dodo.

A home of your own increasingly means a home of the bank’s. Today some 86 million Americans live in homes that are ‘under water’ where the amount owed on the mortgage is greater than the value of the house. Since the financial crisis began in 2008, over one million consumer mortgages have gone into foreclosure. Sales of bank-owned properties are now 34.5 percent of the housing market; homes in foreclosure waiting for resale now account for a three years-supply on the sluggish housing market [..].

[T]he Dream 2.0 [Dream 1.0 was owning a farm] [was about] home ownership in the suburbs accompanied by a consumer lifestyle based on credit card debt and the installment plan, anchored by a white or blue collar ‘good’ job. Once again federal policy aimed to make the American dream open to any white male: jobs were to be plentiful and mortgages cheap. Over time, we’ve extended the concept: you don’t have to be white or male to qualify for a good job but American social policy as a whole is recognizably an adaptation of our family farming heritage to the age of manufacturing.

Now the 2.0 Dream is on the skids — and, as was the case with the death of the family farm, more than one force is at work.

Part of it is the breakup of the blue social model. In the heyday of the old economy, the average American job was long term — lifetime employment in the car factory, working for the phone company or the local bank, or working for the government. A thirty year mortgage with steady payments made a lot of sense in a world of lifetime employment. Today’s careers are more volatile — even when things go well there are ups and downs and, often, spells of unemployment between gigs. Income growth is also unpredictable; unions are negotiating givebacks rather than the steady raises of past generations, and the downsizing of whole industries and the decline in manufacturing employment means that millions of Americans must adjust to falling incomes as life goes on. A mortgage payment that seemed reasonable when father worked at the Chrysler plant becomes an unmanageable burden when the plant shuts down and he gets a job at the 7-11.

Family structure is also changing. Divorce was rare in the American middle class fifty years ago. A nation of kaleidoscopic family arrangements doesn’t fit the thirty year mortgage pattern quite as well as we used to. Divorce creates two new households at a lower income than the original one, forces the split up of assets and changes the nature of real estate markets. A nation with a high divorce rate, all things being equal, is a nation of worse credit risks than a nation which marries for life.

The American household is also getting smaller. More people are remaining unmarried; many married couples are having fewer children. While the shift to smaller households propped up house prices for a while (smaller households mean more households are in the housing market) it tends to reduce credit quality and slowly alters the nature of the housing market. Single parent households have lower incomes and are more exposed to unemployment, and single young people tend to be more mobile than their married counterparts. Single parent, single person and smaller households generally also tend to prefer smaller and more easily maintained residences [..].

Diminishing returns were also a factor. The housing-industrial complex wanted to keep growing; that meant expanding the market. The government, the housing industry and the financial service industry have all worked together to increase the percentage of American families who own their own homes — even though that meant making sketchier loans to more vulnerable borrowers as financial markets were becoming more volatile [..].

So everybody did something wrong — but in another way, everybody is at least partly innocent. The concept that the owner occupied house is the natural and only home for the standard American family, and that the financial system can and will provide fixed rate thirty year mortgages as if it was still 1959 is almost certainly wrong [..]

This Great Recession, the greatest economic meltdown since the 1930s, was touched off by a housing crisis that is intimately linked to the breakdown of the American social model of the 2oth century and the system of home ownership that is so deeply intertwined with it. The recession will end at some point, but the glory days of the old model will not return [..].

We are going to have to rethink the Dream going forward — this is part of the vast process of American reconstruction that urgently needs to get started — a process too many of our nostalgic intellectuals seem unable to face.