A white house with iron, a "For Sale" sign with "Sold" over top and a orange/pink sky
real estate
Homes still too high for 'average' family

"There are just too many consequences. You basically lose your savings rate. For the first time since the Great Depression, Americans have a negative savings rate of 4 percent. It's been captured or stolen by high mortgage payments," says Barakat.

While new homeowners may be happy to have a home, even if that means they're financially overextending themselves, Barakat says a person's standard of living will actually fall when they buy an unaffordable home. Saving less, putting away less for retirement, cutting back on outings and vacations isn't just decreasing the fun on life, it's increasing financial risk. There's more financial stress and, without an emergency fund, homeowners can find themselves further in debt when a crisis strikes.

“If you want that single-family home, swing set and the American dream, the reality is that in major metro areas, most of us will have to commute in order to enjoy that.”

"Now Americans have greater risk, less security, negative savings and are unable to meet emergency expenses with cash reserves. It means that the American dream starts to get modified," says Barakat.

Bad for sellers, good for buyers
Lawrence Yun, chief economist for the NAR, says that in many of the "superstar cities," such as New York, Los Angeles, San Francisco and Washington, D.C., real estate has always commanded a significant premium. Even with the recent declines in property values, Yun says that when compared to median incomes, housing values in these cities will likely always be out of whack. While the recent declines still haven't put homes within reach of most residents in these markets, it is a step in favor of buyers.

"Some of those high-profile markets are encountering up to a 10 percent price decline. Certainly, it's still not affordable, but at least it is better now than it was a year ago," says Yun.

Between the two coasts in Middle America, Yun says homes are much more affordable when compared with median incomes. There, he says, it is less about interest rates and prices and more about jobs. Yun points to markets such as Dallas, Indianapolis and Milwaukee, where most middle-class residents with good credit and decent jobs can afford median home prices.

Sean Snaith, who holds Ph.D. in economics and is director of the Institute for Economic Competitiveness at the University of Central Florida, says affordability evaporated in some areas that saw rapid price increases over the past five years. In many parts of the country, home prices have risen to such levels that many middle-class residents have no choice but to move farther outside the city radius and expand their commutes. He points to Washington, D.C.'s expansion into Virginia and Maryland and Los Angeles' constant expansion inland as prime examples.

"If you want that single-family home, swing set and the American dream, the reality is that in major metro areas, most of us will have to commute in order to enjoy that," says Snaith.

Celeste Ward, a resident of Martinez, Calif., says she and her husband sold their condo in 2005 when they thought the market was topping out. Now that they have a daughter, they're trying to get into a three-bedroom property but find they can't get back into the market after the price decreases. They have considered moving farther inland but are planning to rent and wait until the market falls even further.

"We're just waiting and are seeing more desperation from sellers. Many homes are still overpriced and there are so many out there. We're waiting to maybe get a bank-owned property or something where the seller is really desperate," says Ward.

Barakat agrees people should buy homes when their "personal economies" are ready, not necessarily when the housing market is ready. In the past, many people were jumping into homes with exotic mortgage products and adjustable rate mortgages that are now starting to reset. Barakat says that in most cases, people chose adjustable rate mortgages because they couldn't afford the home in the first place. In January 2008, Realty Trac reported default notices, auction sales notices or bank repossessions on 233,000 homes, 57 percent more homes than in January 2007. For all of 2007, more than 1 percent of all U.S. households faced foreclosure -- almost double the rate of 2006. While the fallout of financial illiteracy is going to affect many homeowners, it will also create new opportunities for new generations.

"Many younger people have told me that they have been priced out of the market and that it was not financially healthy (to buy a house). With these current prices, it is now creating an opportunity for future generations to actually afford a home. I welcome that. Bubbles, while painful, need to burst to get rid of the excess," says Barakat.

Craig Guillot is a freelance writer in New Orleans.

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