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Housing: a crisis with staying power

Americans just witnessed the biggest housing boom in their history. The impact of the bust that has followed looks to be wide and long-lasting. First of a three-part series.

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But here and nationwide, many people who never intended to ride a real estate wave are also at risk.

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"You see all these empty houses now," says Ann Bala, a Cape Coral resident who is losing her home. An injury sidelined her from work, and then she was squeezed between a rising mortgage rate and a falling home value. "It's not even worth $100,000 anymore," she says.

"My phone has been ringing off the hook," says Steve Jones, who heads the Home Ownership Resource Center, which counsels people at risk of foreclosure in the area.

In a parallel trend, homeownership is in decline.

New mortgage products and new channels of credit funded by Wall Street investors helped turn 5 million renters into homeowners in the short span of one decade. By 2004, 69 percent of American households owned their homes, up from 64 percent a decade earlier.

It was what Washington politicians had hoped for, a symbol of American dreams coming true. President Clinton had signed a 1997 tax law, which made it easier for home sellers to keep their real estate profits without having to pay capital-gains taxes. Mr. Bush emphasized the goal of creating "ownership society" – where more Americans can have personal stakes in retirement accounts as well as houses.

But in this decade's hothouse of loose lending, many home buyers were really renters by another name, paying interest but having little chance to build home equity unless property values kept rising.

Homeownership expected to fall

Now some analysts believe the home­ownership rate will come down to about 67 percent.

The bursting of the housing bubble also represents a period of lost wealth, even for people who keep their homes. Some $1 trillion or more is being marked down from household balance sheets, and that has ripple effects on consumer spending.

Retiree homeowners also face a squeeze, as lost housing value erodes their nest eggs.

More broadly, America's access to home equity loans and "cash out" mortgage refinancings is dwindling alongside property values.

And there could be global ripples as well. Worldwide markets have been buoyant for real estate and other investments fueled by borrowing. From commodities to stocks to emerging-nation bonds, assets have been rising in value.

It's unclear if the party in global markets is winding down for now. How things go in the United States economy could hold the key.

For now, a low unemployment rate and rising paychecks have been helping to offset housing's impact.

But the crunch has dampened American spirits just in time for presidential primary elections. One major survey of consumer confidence has fallen for four straight months – a possible leading indicator of recession. This makes the economy a volatile campaign issue, perhaps eclipsing Iraq.

And policy responses to the housing crunch will be a focus for the next president, as they are for Bush. For now, the White House and Congress are looking at ways to slow the rise in foreclosures – including an interest-rate freeze for some borrowers announced by the president last week.

Further down the road, new laws and private-sector measures could reshape the financial industry. "Nonbank" lenders could be brought under the wing of federal regulators, among other things. Even the Fed could rethink its role in the economy.

Critics say that the world's central bankers kept interest rates too low in 2003 and 2004, because they focused too much on official inflation indexes and not enough on warning signs in assets like homes.

"The Fed takes no responsibility for asset bubbles," says Dean Baker, an economist at the Center for Economic and Policy Research in Washington. "I think that's something that will be reexamined."