Housebound

Henry and Rachel Ross aren't looking for a mansion. Their needs are simple: a home with enough space for their children (their third is due in November), good schools and a neighborhood that's safe enough for Rachel to jog in. As the couple--he's a carpenter, she's a part-time mortgage broker--have outgrown their rental in El Cerrito, Calif., they've put offers on 20 properties. Each time they've been outbid by another Bay Area couple. So the Rosses believe they've got little choice but to stretch for the biggest mortgage they can to get the bid up to $350,000 for a home. "That's as far as we can comfortably go," says Rachel, who admits that maybe "comfortable" isn't the right word to describe their looming indebtedness. "It's gotten to the point now, when we make an offer on a house, I'm relieved when we don't get it," she says. "It'd be such a tight mortgage."

Stretching to buy a first home has long been a rite of passage, one only partly assuaged by talk of homeownership as the cornerstone of the American Dream. And for many families who've owned homes during the last five years, dreams don't get much better: in many markets home values have risen dramatically, while record-low interest rates have helped homeowners refinance into lower monthly payments. But as prices continue rising and mortgage rates start creeping up, some young home buyers are facing a situation that feels more like a nightmare. What if trendy talk of a real-estate bubble proves to be false? For house hunters, the real bad dream is that prices keep rising, forcing too many families to keep stretching too far to buy one.

This worry forms the core of "The Two-Income Trap," a provocative new book by Elizabeth Warren and Amelia Warren Tyagi. Warren, a Harvard Law professor, and Tyagi, a former McKinsey consultant (and Warren's daughter), have analyzed data on household spending, housing costs and bankruptcy filings. They report that over the last 25 years, bankruptcies by families have risen 400 percent. By the end of the decade, they project, one in seven families--many headed by college-educated professionals--will have filed for bankruptcy. And despite conventional wisdom that many bankruptcies are driven by profligate spending on cars, clothing and vacations, Warren and Tyagi focus on housing costs as the prime culprit. The generational shift toward two-income families hasn't helped, they say. Even though today's two-income family earns 75 percent more than the one-earner family of a generation ago (after adjusting for inflation), they figure that these families have less discretionary income due to housing and child-care costs. "By the usual logic, sending a second parent into the workforce should make a family more financially secure, not less," they write. But instead, "families were swept up in a bidding war, competing furiously with each other for their most important possession: a house in a decent school district."

The authors' concerns resonate with financial planners and debt counselors. They see some clients becoming too enamored of the investment potential of homes; others see more families qualifying for a mortgage based on two incomes without factoring in how parenthood could change that equation. Couples in this situation aren't blind to the risks; they just accept them as a fact of modern life. In November, Kathy Kula will return from maternity leave to her job as a technical writer. She and her husband, Stan, a college fund-raiser, need both their incomes to pay the mortgage on their four-bedroom colonial in Hardyston, N.J., provide day care for their two kids and pay other expenses; they have little savings to fall back on. But their jobs seem secure, so they're not too worried. Besides, since they bought their home for $250,000 in 1999 it's doubled in value, and they feel lucky they bought early. "I can't imagine people buying today, paying $500,000 for the home we have, how they survive," Kathy says. "It blows my mind."

Economists and housing-finance experts haven't seen the book, but they're skeptical there's a looming crisis. Yes, home prices in some markets have reached levels that seem just plain silly, but low mortgage rates make the average home more affordable today than it was during most of the 1980s, says Freddie Mac economist Frank Nothaft. For families who already own homes that have risen in value, that home equity could help them weather a rough patch. Economists also dispute the notion that two-income families face bigger risks than one-income couples. Although housing pros say the growth of low-down-payment mortgages has driven delinquencies higher, they say the overall risks of homeownership are receding, thanks to the refi boom (lower payments) and the recent quickening of the economy (fewer layoffs). Says economist David Lereah of the National Association of Realtors: "I don't see where the trap is."

But talk to young couples in high-priced markets like San Francisco, and there are clear signs of distress. Some couples say they don't know anyone who's able to buy a house without parental help. In "The Two-Income Trap," the authors suggest ambitious solutions to make housing more affordable. They envision a voucher system that would let parents send kids to any school in the region, reducing competition for homes in a handful of top school districts. They recommend a consumption tax that would let families build emergency-savings funds (remember those?) that enjoy the same tax advantages as 401(k)s. They advocate free preschools to ease family budgets, as well as stricter limits on lenders. The authors say their proposals are getting interest from both Republicans and Democrats. Whether their ideas become politically viable remains to be seen. Finding new ways to help home buyers will never be as much fun as daydreaming with the Sunday real-estate section. But the authors provide a reminder that for younger families who haven't yet found their piece of the American Dream, this boom can feel like one heck of a bummer.