Shiller: American Dream Has Become a Nightmare

Monday, 15 Mar 2010 04:25 PM

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Buying into the American dream of home ownership can be a sure road to financial distress, says Yale economist Robert Shiller.

"American mortgage institutions encourage people to take a leveraged position in the real estate market, which is quite risky because home prices can and do decline, as we have learned so painfully," Shiller writes in The New York Times.

"Leverage a risky investment 10 to 1 and you can expect trouble — and we have plenty of it today. More than 16 million homeowners owe more on their mortgages than their homes are worth."

Yet, while the crisis in the housing market shows that our current approach is far from perfect, "there is a certain wisdom behind it, related not only to economic stimulus but also to the preservation of a sense of national identity," Shiller says.

The best answer isn’t found in traditional economics but rather in U.S. culture, a long-standing feeling that owning homes in healthy communities is connected to individual liberties that embody our national identity, Shiller points out.

“Historically, homeownership has been associated with freedom, while renting — often in tenements or mill villages — has been linked to the oppression of a landlord.”

House Financial Services Committee Chairman Barney Frank wants the four largest providers of U.S. mortgages to write down second mortgages to prevent "a deepening crisis" in the U.S. housing market, Reuters reports.

Frank says that taking losses on the second mortgages is necessary in order to allow modifications of the first mortgages to be made, which he believes is critical to preventing further home foreclosures.

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