Americans still want to own homes, but attitudes toward homeownership have changed, with homes no longer seen as source of ready cash; people expected to be more conservative than they were in the past, says chief economist at Fannie Mae

Allison Oesterle

NEW YORK , January 25, 2014 (New York Times Online) – In 1990, almost a million houses were built in the United States. One of them, at 12204 Backus Drive in Bowie, Md., was a four-bedroom colonial with a bay window. The average home price that year was $150,000; this house, in a desirable middle-class suburb of Washington, sold for $227,140.

Like every house, it became a vessel for its inhabitants’ personalities and possessions — the vast record collection of the first owner, the wedding photos of the most recent ones. It also came to hold a promise of prosperity, as the boom encouraged Americans to think of houses as not just places to live, but as investments that, thanks to rising prices, could dispense huge cash returns.

The story of 12204 Backus Drive is in many ways the story of the American housing market: first anodyne, then ruinous, then resilient. It is peopled with losers and villains, lucky winners and a young couple hoping for, but not counting on, good fortune. This house’s value peaked at $540,000, plunged to $215,000, and rapidly convalesced until, last year, it sold for an amount that might be considered auspicious.

Virtually all the economic turmoil of the last seven years started with the housing market, which powered the economy during the bubble and then nearly melted down, taking the financial system with it. Almost five million homes were lost in foreclosure in the last five years, according to CoreLogic, and houses in some cities lost two-thirds of their value before starting to recover a couple of years ago.

Now prices have bounced up 10 to 25 percent from their bottom, so quickly that a few economists have warned of a second bubble. As the rebound effect fades and interest rates continue to rise, that growth, already uneven, is expected to slow considerably. But experts say that if the job market keeps improving, the housing market will rise with it.

The various owners of 12204 Backus Drive still see homeownership as a sound choice — even those who were badly pummeled by market forces. They are joined in that belief by a vast majority of Americans; lending for home purchases rose from a low of $404 billion in 2011 to an estimated $652 billion last year, according to the Mortgage Bankers Association.

But while Americans still want to own their homes, the scars of the financial debacle hold them back in other ways. Some large banks, unmotivated by low interest rates and afraid they will have to buy back any loans that go bad, have cut back on mortgage lending. Tighter lending standards are shutting out close to 12.5 million consumers who would qualify in normal times, according to an analysis by Mark Zandi, chief economist for Moody’s Analytics. But perhaps more significant, individual attitudes have changed. A house is a residence, sure. A better investment than renting, yes. But it is no longer an A.T.M., a source of ready cash for a better lifestyle.

Nor will it lead to as much economic growth. Doug Duncan, chief economist at Fannie Mae, the mortgage giant, says homeowners today are less likely to spend their equity on renovations, cars, clothes or college. Many people who refinanced when interest rates were in decline, he said, have opted to pay down principal faster instead of lowering their monthly payments. “People will be more conservative than they were in the past,” he said.

Suburban Dreams, Found and Lost

Bowie, a bedroom community in Prince George’s County, a 30-minute drive from Washington, was built on the ideal of affordable suburban living. It was first developed in the 1960s by the company that created Levittown, N.Y. The 1980s saw the rise of a second wave of homebuilding, as more luxurious subdivisions with larger houses, swimming pools and tennis courts were carved out of forests.

At that time, a house was a place to live, not a way to get rich. The first owner of 12204 Backus Drive, a teacher, actually took a small loss — about $10,000 — when he sold it after eight years and moved to another suburb of Washington.

But by 2002, prices had been rising for roughly a decade — and Roberto Ramos and Chong Kim, owners of a seafood takeout counter, bought 12204 Backus Drive for $299,000. They put 10 percent down and took out a fixed-rate mortgage.

Like so many houses at the time, this one quickly became a source of cash. Mr. Ramos and Ms. Kim refinanced twice, which allowed them to siphon out $175,000. In retrospect, such behavior may seem reckless; hundreds of thousands of people wouldn’t have lost their homes in the crash if they hadn’t depleted their equity during the boom. But for those with good timing, like Mr. Ramos and Ms. Kim, the system worked: In April 2006, they sold the house for $540,000, more than enough to pay off their loans. The value of 12204 Backus Drive had risen 80 percent in four years.

Even at that price tag, the house struck Leslie Johnson as a good deal. Rising prices had taken on an aura of inevitability, and the whole country seemed to believe that they would never fall.

Ms. Johnson, a billing specialist at a law firm, had a son who was living in a nursing home after being severely disabled in an accident. She already owned a house, but says her homeowner’s association was making it difficult for her to install a wheelchair ramp and to build an accessible bathroom so her son could live at home.

The $540,000 price of the Backus Drive house seemed beyond her reach. But after providing documentation of her income (which she declined to disclose publicly), she was told that she had been preapproved. “They told me to go ahead and buy and just refinance later on to a more manageable mortgage payment,” she said.

From that point on, some of the most unsavory aspects of the subprime lending industry came into play.

With a credit score at the low end of average, Ms. Johnson got a loan with high interest but a low teaser rate for the first two years. In February 2006 — when prices in Prince George’s County were nearing their peak — she put 5 percent down, and got a piggyback loan to cover the rest of a 20 percent down payment. Even with the teaser rate, her monthly payment was $4,175 for both loans, more than she was taking home in her paycheck each month. (That figure is based on public records; Ms. Johnson recalls the payment being somewhat lower.) But she had some savings that would help her cover the payments, she said, until she could refinance, which the bank assured her she could do very soon.

Less than a year later, she did refinance, but into a mortgage with a higher interest rate. Public records show that she consolidated the two original loans and took out an extra $20,000 in cash, but Ms. Johnson said she never saw the $20,000. (“What typically happened was people who had any home equity were targeted by mortgage brokers to refinance or buy a new home,” says Ellen Schloemer, spokeswoman for the Center for Responsible Lending. “The equity that they had would get lost in the fees and the charges that people ended up paying to get that new mortgage.”)

The new loan, from New Century Mortgage, was interest-only at first, so Ms. Johnson’s monthly payment actually decreased a bit, to $4,000. But that did not make it affordable. By her fourth payment, she was falling behind, and after less than a year, she had stopped paying altogether. She spent months trying to persuade the bank to lower the payment.

In January 2008, her loan servicer gave her a loan modification that actually increased her payments to more than $4,500.

Wanting out, Ms. Johnson hired a man named Barry Edmonds to negotiate a short sale with her lender. She began making her mortgage payments to an account he controlled. After more than two years, in May 2010, he instructed her to move out temporarily so he could ready the house for sale, she said, and she left behind furniture, photo albums and a new Jenn-Air oven. When she returned a couple of months later to pick up some belongings, she saw notices that the house was being repossessed. The locks had been changed. Shortly after that, Mr. Edmonds, and some $100,000 of her money, disappeared.

(Mr. Edmonds was fined in absentia by Maryland authorities for more than $100,000 in Ms. Johnson’s case, and did not respond to attempts to reach him by phone and email and on social media.)

Ms. Johnson described Mr. Edmonds as the malefactor in her story, unaware that virtually every financial entity she dealt with ultimately faced investigations and lawsuits related to predatory lending, foreclosure robo-signing, misleading investors or other abuses. As early as 2007, for example, the Federal Deposit Insurance Corporation ordered Ms. Johnson’s original lender, Fremont Investment and Loan, to stop making loans that borrowers could not afford, saying that its lending practices “substantially increased the likelihood of borrower default.” One recent analysis suggests that Wall Street will eventually have to pay around $50 billion for the banks’ role in the mortgage crisis, with about $15 billion of that going to consumers in the form of debt relief and other aid.

So far, Ms. Johnson said, she has received nothing except a wrecked credit record.

Hardwood Floors From the Ashes

For two years, 12204 Backus sat vacant, its lawn overgrown and the paint on its garage door peeling. The bank tried to sell it for $265,000, then for $250,000. At one point, Martha and Jonathan Kim, a young couple out house-hunting, peered through a window and saw a mess. “No way we’re buying this house,” Ms. Kim said to herself. “I don’t care how cheap it is.”

But foreclosed homes like this one were attractive to investors with cash. Big fund managers like the Blackstone Group and Colony Capital snapped up 100,000 homes nationwide, according to Green Street Advisors, a research firm. Investors helped prices recover faster, but regular buyers, particularly those with impaired credit, complained that they couldn’t compete.

“When home prices were really high, there was no lending regulation, so the middle class and even the working class were able to buy these homes at very high prices,” said Glenn Kelman, chief executive of Redfin, the online real estate platform that helped The New York Times trace the history of 12204 Backus Drive. “And then, when homes became extremely affordable, the horse was out of the barn and the doors were closed, and they couldn’t borrow.” As late as December, investors accounted for one in five purchases of existing homes, according to the National Association of Realtors.

Prices in Prince George’s County never fell quite low enough to attract bulk buyers. That created an opportunity for smaller investors, like a construction company called Greenway Homes that moved from construction to flipping houses.

In April 2012, an affiliate of Greenway bought 12204 Backus Drive for $215,000 cash. Two Dumpsters full of trash had to be tossed, and all appliances — except Ms. Johnson’s Jenn-Air oven — replaced, said Traci Barsy, who oversaw the renovation. The company usually makes a profit of 10 percent, said Kate Weaver, the vice president, but she estimated that the return was lower for this house because its size drove up the renovation cost.

The house received a new roof, air-conditioner, hardwood floors, tile and carpeting, a wet bar in the basement and extras like custom cabinets, upgraded molding and brushed nickel fixtures. When the listing hit the Internet, priced at about $390,000, a friend sent the link to Ms. Johnson. Having sunk her retirement savings into the house, Ms. Johnson was moving from rental to rental, unable to provide a suitable living space for her son. When she saw the photographs, she cried.

The Kims — he a 31-year-old auto parts manager, she a 28-year-old second-grade teacher — saw the listing, too. They had been searching for a house for two years and had tucked away more than $100,000 by living with Mr. Kim’s parents, said Ms. Kim, who calls herself a “hard-core saver.” “I think paying rent is the biggest waste of money,” Ms. Kim said, adding that the couple weren’t counting on increasing home values or even a stable economy.

“We didn’t overextend ourselves like so many people did in the past,” she said. “We would still be able to afford the mortgage payment if one of us lost our jobs.”

Mortgages are roughly seven times harder to get than they were five years ago, according to the Mortgage Bankers Association’s credit availability index, and they show few signs of getting easier. The average credit score of borrowers who receive loans guaranteed by Fannie Mae and Freddie Mac has increased to about 760 from about 720 in 2000, according to Black Knight Financial Services.

Even with their large down payment, the Kims are paying a higher interest rate, 3.9 percent, than if Mr. Kim had had a better credit score, they said.

The couple bought the house in March 2013; the recorded sale price was $381,000. Ms. Kim was initially reluctant to pay so much for a house that had so recently been much cheaper — until she saw the renovation. “It was so beautiful,” she said. Of the investor, Mr. Kim said, “I’m sure they deserve what profit they made.”

In the aftermath of the crash, many have made the argument that public policy overly encourages homeownership. Robert J. Shiller, the Nobel-winning economist (and a contributor to Sunday Business), says that while owning a home may be worthwhile for many reasons, historically, most homeowners have reaped little financial return for their investment.

Chris Mayer, a real estate professor at Columbia Business School, argues that homeownership is its own kind of social safety net, whether or not it is profitable. Homeownership rates, he said, are higher in cities like Charlotte, N.C., where values are fairly stable, than in coastal areas where they consistently climb. “Just by living in your home, you’re saving for your retirement,” he said. “This is a place where I think most homeowners get it right, compared to economists.”

As for 12204 Backus Drive, Mr. Mayer pointed out that even its lowest price in the crash was about the same as its previous trough, when the first owner sold it, but that its peaks had been much higher.

Despite their travails, all the recent owners of the house aspire to homeownership. The big winners in the boom, Mr. Ramos and Ms. Kim, went on to get burned in the bust, buying a bigger, more expensive house and losing it in a short sale. They are saving to buy again, Mr. Ramos said.

Ms. Johnson, who went into foreclosure, is less hopeful, but would like to own a home. “I do believe in having your own home,” she said. “If you’re paying rent, you’re just helping someone else pay off their mortgage.”

Martha and Jonathan Kim agree, and right now their $1,800 monthly mortgage payment is cheaper than rent would be. But in the house on Backus, more than half the rooms are sparsely furnished and rarely used, and that makes Ms. Kim uneasy.

Seated at her kitchen table, she half-joked about taking in boarders. “Sometimes I feel like we’re wasting money,” she said. “We’re just kind of sitting on too much land.”

PHOTOS: This four-bedroom home in Bowie, Md., has sold several times since 1990, at prices that have bounced between $215,000 and $540,000. Below center, the home in 1997. (BU1); Martha and Jonathan Kim are the newest owners of the home on Backus Drive, buying it after a renovation. “We didn’t overextend ourselves like so many people did in the past,” Ms. Kim said. “We would still be able to afford the mortgage payment if one of us lost our jobs.” (PHOTOGRAPHS BY STEVE RUARK FOR THE NEW YORK TIMES) (BU4)
GRAPHICS: In Six Houses, A Market Mirror: All over the country, house prices are rising. But in some regions, prices are recovering from much deeper troughs. Below are six houses that were sold several times in the last few years, reflecting the overall market trends in their metropolitan areas. (Sources: Redfin; Zillow) (BU4)

A home’s value has taken sharp turns since 1990. But all of its owners, past and present, still see homeownership as a sound choice.

One lesson from the crash: A house is no longer an A.T.M. for a better lifestyle.
Copyright 2014 The New York Times Company

* All content is copyrighted by Industry Intelligence, or the original respective author or source. You may not recirculate, redistrubte or publish the analysis and presentation included in the service without Industry Intelligence's prior written consent. Please review our terms of use.