‘The 50-State Katrina’

Before the unemployment rate hit double digits and banking giants such as Lehman Brothers collapsed, the financial crisis arguably began with houses, condominiums, and gated communities in cities such as Stockton, Calif. There, Francisco Fortes worried that he would forever be priced out of a housing market in which prices would continue to soar. So, despite the salesman's self-admitted questionable credit, he took out an interest-only loan in 2006 and purchased a $398,000 three-bedroom house with a two-car garage and a landscaped backyard with bushes and trees in the tidy shape of a half-moon. Fortes put his $80,000 inheritance toward the down payment with the assumption that he would recoup that cash by refinancing in a few years. Only now, his home is worth $180,000. Two of his neighbors recently abandoned their properties after values dropped by more than half. "There are a lot of FOR SALE or FOR RENT signs in my neighborhood," Fortes says. "It makes me wonder why I should pay for this house."

Roughly two years after the Great Recession began and one year after President Obama signed the $787 billion economic-stimulus bill, the U.S. housing market remains sickly. Foreclosures that initially afflicted subprime borrowers, are now hitting the jobless middle class. It's hard for new home buyers to secure mortgages unless they have excellent credit, a sizeable down payment, and a stable job history. Entire residential neighborhoods in states such as Ohio have been reduced to empty, boarded-up homes that scavengers comb through for electrical wiring, siding, pipes, or stained glass. "We don't think we've found the bottom of the housing market yet," says Julia Gordon, senior policy counsel for the Center for Responsible Lending (CRL). "Most economic recoveries don't become robust until the housing market is involved, and most recoveries are housing led."

It's not as if the federal government has held the housing market at arms length. Within the last two years, according to the Congressional Budget Office, Washington has injected $300 billion into the housing and mortgage markets from taking over Fannie Mae and Freddie Mac to creating loan-modification programs for distressed homeowners to offering $8,000 tax credits for first-time home buyers. While economists say the housing crisis could have been much worse had the government not intervened, reviews of government-sponsored programs remain mixed and the future of the government's involvement in this sector is unclear. "The federal government is the entire mortgage market right now," says Karl Case, professor of economics at Wellesley College. "Whatever they decide to do will determine who will end up keeping their homes. It's as simple as that. It's going to be a political hot potato."

For many Americans, the fate of their homes seems up in the air. In Stockton, 33-year-old Fortes can no longer afford to pay his mortgage, which has ballooned to $2,600 per month from $2,100. His fiancée lost her job in September 2009, and Fortes spends his days wondering where his family, including this children, ages 2 and 10, will live. Despite his repeated attempts to apply for a loan modification, he has been told that he does not qualify. "It's just so stressful," he says. "I'm trying to work with my loan people, but I've been talking to them for over a year."

This sense of limbo in the housing market is not expected to subside in 2010. Foreclosures are on track to set another record as the unemployment rate remains high and as homeowners with primary loans continue to default, says Rick Sharga, RealtyTrac's senior vice president. This high rate of foreclosures, in turn, will pull down the values of home prices; already, about 25 percent of homes are underwater, meaning they're worth less than their mortgages. "There's a tremendous amount of clean-up, especially in minority neighborhoods," says the CRL's Gordon. "Some people have described the foreclosure crisis as the 50-state Katrina."

This ongoing onslaught most likely will result in less homeownership for years to come and, in turn, less stable neighborhoods. With the mortgage market so tight, it's becoming increasingly difficult for people to secure home loans. According to the U.S. Census Bureau, home ownership has dropped from a high of 69.1 percent in 2005 to 67.2 percent. More and more people are opting (or being forced) to rent. Worse, housing counselors across the country anecodotally say they're hearing stories of families moving in with friends or relatives, living in cars, or finding themselves homeless. "Many of these people had every expectation of having an upper- or middle-class lifestyle, and it's collapsed," says Dianne Cantor, executive director of Centro Campesino, a nonprofit in Miami-Dade County.

You can most clearly see the aftermath of the housing bubble and its weak recovery on the streets of cities such as Stockton, New York, Las Vegas, or Miami. An abandoned house on West 83rd Street in Cleveland recently exploded because the gas was not turned off, and neighborhoods such as Fortes's are gradually emptying out as homeowners face foreclosure, or as they abandon their homes in favor of cheaper rent. "Nobody is accountable," says Darren Hamm, housing specialist at Neighborhood Housing Services of Greater Cleveland. "What you are left with are houses that are completely dead assets." It's an ironic end for properties that once held such hope for the American middle class—and for those who aspired to join them.