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A "bank foreclosure sale" sign is posted in front of townhomes on August 12, 2010 in Los Angeles, California. U.S. banks repossessed homes at a near record pace to drive up July foreclosures. (Kevork Djansezian/ Getty Images/Kevork Djansezian/ Getty Images)
A "bank foreclosure sale" sign is posted in front of townhomes on August 12, 2010 in Los Angeles, California. U.S. banks repossessed homes at a near record pace to drive up July foreclosures. (Kevork Djansezian/ Getty Images/Kevork Djansezian/ Getty Images)

Housing

The death of an American dream Add to ...

It's a story that is as American as apple pie: a couple with young children decides to settle down, looks for a place outside the city, and borrows to buy their first house.

For Andrea and Raymond Quenneville, the search brought them to the small town of Merrimack, N.H., where they found a yellow colonial-style home with an ample yard and a two-car garage.

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The timing seemed good, long after an unprecedented housing boom went bust and took the U.S. economy down with it. Buying a house was just "what you do when you're a grown-up," Ms. Quenneville said, a view shared by the couple's parents and friends.

Yet what for their families was the epitome of security - not just a place to raise children but a financial nest egg - doesn't feel that way for Ms. Quenneville. "When I think of it as an investment, it's very depressing, so I try not to think of it that way," she said. "We're not going to see the appreciation that people did over the past decade."

Then there's the state of the housing market, clogged with an oversupply of homes and debilitated by a shortage of buyers. "It used to be that you thought, if you have to move you'll be able to sell and get out of it and be fine," she said. "That's not the case any more so that really weighs on you."

Call it the American dream that died. The slump in U.S. housing, now more than three years old, is the most severe since the Great Depression. A move by the government to revive the market - through a tax credit for first-time home buyers - met with some success earlier this year, but after the credit expired, sales collapsed in July. Now economists fear further declines in home prices, which have already fallen 30 per cent since their peak in 2006.

The days when Americans could count on their homes as the pillar of their financial affairs - a seemingly magical asset, bought with borrowed cash but steadily increasing in value, tapped to fund college tuitions, second homes, and retirement travel - are past. Even if the market eventually recovers, as many expect, the era of the home-as-nest-egg is over for the foreseeable future.

In this brave new world, housing prices don't always go up, and if they do, the pace is more likely to be in line with inflation. People can find themselves trapped in their homes, unable to sell because their house is worth less than what they owe on their mortgages, a condition now shared by one in four U.S. homeowners.

Looking ahead, experts see a housing landscape where mortgages will be harder to get, the rate of home ownership will fall, and renting will increase. "We're going through a fundamental shift," said John McIlwain, a senior fellow at the Urban Land Institute in Washington, DC. "People are shifting away from the house as an investment and more toward the house as a home."

After hovering in a tight range for three decades, home ownership rates began to shoot up in the mid-1990s, peaking at 69 per cent in 2004. Mr. McIlwain believes that the rate of home ownership will continue to decrease, returning to the range that prevailed before the housing market took off. It now stands at 66.9 per cent, the lowest figure since early 1999.

Part of the change, he said, is generational. The children of baby boomers - so-called 'Generation Y' - are joining the work force in a time of turmoil, often saddled with large educational debts. They're going to rent longer both because they have to and because they want to, he predicts, since it doesn't tie them down to a single location.

Back when he and his wife were in their 30s, he said, they didn't think about saving. They bought a house when they needed it, comfortable in the belief that its value would increase. Over the years, they've done very well in their real estate transactions. But he doesn't expect his son and daughter-in-law, who are now in their 30s, to have the same experience.

"These days, homes are more akin to savings accounts than stock market investments," said Stan Humphries, chief economist at the real estate site Zillow. He expects only minimal increases in home prices over the next three to five years. After that, he predicts they'll appreciate at a more "normal" rate of 2-4 per cent a year. But people shouldn't expect a home's value "to appreciate much greater than inflation," he said.

In some ways, that's back to the future. Joseph Gyourko, a professor at the University of Pennsylvania's Wharton School, has written that over the long term, real estate has been a pretty lacklustre investment. Between 1975 and 2008, the price for houses of similar quality and size increased an average of about 1 per cent per year after inflation, he noted. Treasury bills, by contrast, earned 2 per cent a year in real terms, while corporate bonds and stocks fared better still.

Some say the talk of a sea change in attitudes toward housing is overdone. The "current sentiment against owning a home is really a short-term fad," said Mike Ruzicka, president of the Greater Milwaukee Association of Realtors. "It's easy to bash real estate as an economic institution because the economy is bad right now and everything is being called into question - as it should be. But, when the dust settles, people will still want to raise their kids in their own home."

Perhaps surprisingly, given the events of the last three years, 70 per cent of Americans still believe that buying a home is a safe investment, according to a survey conducted in late 2009 and 2010 by housing giant Fannie Mae. Of course, back in 2003, a whopping 83 per cent of people described a home as a safe investment, trumping even savings accounts (in the most recent survey, bank accounts managed to take top spot for safety).

The American romance with owning your own home is almost as old as the country itself. Poet Walt Whitman wrote back in the 19th century that "a man is not a whole and complete man unless he owns a house and the ground it stands on." Every modern U.S. President has extolled home ownership as a civic, and in some cases, patriotic good.

Owning a home is the "classic expression of the American equation of individual virtue and financial success," said Thomas Sugrue, a professor at the University of Pennsylvania who is writing a history of the modern real-estate industry. "Renting in the U.S. has always had a whiff of stigma attached to it."

That stigma is wearing off rapidly. Prashant Jeloka, a Web consultant, 32, who lives in Boston with his wife, is a perfect potential first-time buyer. But when Mr. Jeloka, who admits a minor obsession with Excel spreadsheets, crunched the numbers, he came to the conclusion that it was better to rent unless the couple was ready to stay in a home for more than a decade.

"I'm not opposed to buying," he said, but he has forcefully resisted the suggestion - from friends, from his father-in-law back in India - that it makes good financial sense. What his calculations reveal, he said, is that "if I buy it's for emotional reasons, and this is the price we might pay for that emotion."

For the Quenneville family, their decision to buy was the culmination of eight years of planning and saving. They bought their five-bedroom house for $370,000 (U.S.) in January 2009 and paid about 15 per cent of the purchase price as a down payment.

Ms. Quenneville, a stay-at-home mom of four, relishes the fact that the family can decide to erect a swing set in the yard, paint their walls, and decide whether to get a dog. But she also misses the renting life, when there was no mortgage or roof repairs to worry about. As for the financial rewards of home ownership, she is under no illusions. "If I was looking at it purely as a financial investment, I would not purchase a home," she said. "But we need a place to live."

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