By Catherine Holahan, MSN MoneyThis article is part of a series on the economic downturn and its impact on different income groups. Click here to read about a family getting by on $400,000 and another on $32,000.
Ana Tacan's house turned against her.
The house was always more than a home. The three-bedroom California property was a sign that Tacan's family had finally made it. It meant that she and her husband, Ron, were established as mortgage-paying members of the American middle class, with stable jobs paying a combined $60,000 annual salary, benefits, money to support their three kids comfortably and an investment guaranteed to appreciate.
Or so it seemed.
'Not able to support the family'
"It felt like we had accomplished what we had been working for," Tacan said of the decision to purchase the home in 2001 for $135,000.
But the Tacans' house ultimately destroyed the lifestyle they had tried to build around it. The family accumulated tens of thousands in credit card debts attempting to pay off what is now a $2,000-a-month mortgage -- more than their home's assessed value. High interest rates on credit cards have aggravated their situation, forcing them to eliminate many of the expenses that once defined their comfortable, middle-class existence. They have switched to a cheaper car, stopped dining out and cut back on the kids' extracurricular activities, such as cheerleading for one of their teenage daughters.
Now, they are even trying to sell their house -- at a loss.
"Everything has changed," Ana Tacan says.
No shopping, no cheerleading
The pain of the housing bust may well be most extreme among the middle class. Before the downturn, many middle-income families -- defined as those supporting children on about $63,000 a year -- were upgrading their lifestyles with borrowed money, much of it from home equity loans.
With home values down nearly 20% over the past year and credit tight, many middle-class families are confronting cash squeezes, crippled by debt and unable to afford their homes.
In a Feb. 18 speech unveiling a $275 billion plan to bolster the housing market, President Barack Obama said that more than six million Americans face foreclosure.
"Today home values have fallen so sharply that, even if you make a large down payment, the current value of your mortgage may still be higher than the current value of your house," said President Obama, speaking to a crowd in Arizona. "So, no bank will return your calls and no sale will return your investment."
To be sure, many middle-class families must shoulder some of the blame for their plight. Too many treated their homes as both shelter and bankroll, racking up large debts with the expectation that the value of the homes would continue to increase and that the debts could one day be paid out of handsome profits on the home sales.
Many families saved far too little for emergencies. In the years leading up to this recession, the personal savings rate was lower than 1% and even dipped below 1% for a three-month period -- meaning many Americans had put more on their credit cards that quarter than in their piggy banks.
See where the Tacans' money goes
But it would be unfair to blame the crunch solely on the excesses of the middle class. After all, it has never been harder for middle-class families to live within their means.
Though middle-class U.S. families earn more today than prior generations -- due in large part to dual incomes -- the proportion of their incomes needed to cover necessities is much higher. A study by Harvard law professor Elizabeth Warren found that the proportion of middle-class income spent on housing, health care, transportation and child care is now almost double what it was a generation earlier. Taxes have increased proportionally as well. As a result, the middle class has been spending less on clothing and food -- budget items that are more flexible when times are tough.
Warren now leads a government panel overseeing the bank bailout. She was a co-author of "The Two-Income Trap," a best-selling explanation of the financial problems facing the American middle class.
According to recent government statistics, about 34% of the money the average American family spends goes to housing. An additional 18% or so goes to transportation costs, 12% to food, 11% to insurance and 6% to health care. Entertainment takes less than 6%. Apparel takes barely 4%.
"The American family today puts away nothing and frankly has been putting away nothing for the past five or six years," Warren said during an April 2008 lecture at the University of California, Berkeley. "By the time they pay their five basic expenses, they have less money left over than their one-income parents had a generation ago."
The Tacans are but one example. More than half a dozen families interviewed for this series -- families in six states with a range of incomes -- told similar stories of struggle with debts taken on to pay for necessities, including homes, cars and visits to their doctors.
The Tacans didn't always struggle with debt. Until last year, they were doing better than ever, at least on paper. Ana Tacan's job with a nonprofit child care program and her husband's position in a university's finance department each paid about $30,000 a year, plus benefits. Their combined salaries allowed them to afford pleasures that most Americans view as middle-class perks: two cars and vacations to big amusement parks.
The two incomes also enabled them to save for a house. In 2001, the Tacans purchased a three-bedroom house in San Joaquin County, Calif., for $135,000. They put down 10%. By 2005, the home's value had increased more than 90%, based on sales of surrounding properties.
The problem was, the Tacans' expenses also increased. They welcomed their third child into the world about the same time they bought the house. Ana Tacan soon decided she would return to work, but that decision meant the family would have to pay for full-day care for their baby son. That cost $400 to $500 a month, an added expense that did some major damage to the monthly budget.
The family faced increased transportation costs as well. The couples' two older children were fast approaching their teen years. The Tacans decided to get a car that could carry the whole family safely and in reasonable comfort. That was an added cost. And the price of gasoline was steadily rising.
"We were pretty much living check to check," Ana Tacan says. "We never really did feel like we had a lot left over where we could actually save. If we ever did have money to put aside, it was when we got our tax returns."
To bridge the gap between their income and their rising cost of living, the Tacans opted to tap into the equity building up in the house by refinancing. They used the cash to help pay the $600-a-month lease for a new Toyota Sequoia SUV and the $160-a-week fuel bills that came with it.
But even that wasn't enough. As gas prices spiraled upward, Tacan and her husband refinanced their home again.
The last mortgage move proved disastrous. Their payment, which had already risen to a manageable $1,600 a month, jumped to $2,000 a month. That single payment absorbed half of the Tacans' $4,000 monthly take-home pay. Once the family paid monthly transportation costs of $1,300, plus the $400-a-month grocery bill and the child care costs -- and purchased a clothing item or two for the kids -- it was a couple of hundred dollars in the hole.
Eventually, the Tacans had racked up between $20,000 and $30,000 in debt.
"Now what I am constantly thinking is, 'Why did we have to refinance?'" says Ana Tacan. "We felt like, everybody is doing it, and it seemed like it was a good time for it . . . if only there had been somebody there to stop us."
When the housing market crashed last year, the value of the Tacans' home plummeted. Suddenly, they owed significantly more on the mortgage than the house was worth. They are now in the midst of a short sale, a process through which the bank offers the home at a price worth less than the amount outstanding on the mortgage and forgives part of the initial owner's mortgage debt.
Their home is on the market for $99,000 -- $36,000 less than they paid for it in 2001.
"The feeling that you have paid so much already and you don't have anything to hang on to, it affects you mentally every day," Tacan says.
President Obama's so-called "backyard bailout" includes help for families in the Tacans' position. It provides $1,000 credits to lenders that modify loans so that mortgage payments are within 31% of borrowers' incomes. It also allocates $200 billion for Fannie Mae and Freddie Mac to help refinance mortgages.
But the aid came too late for the Tacans.
They now rent in the same community they had lived in as homeowners. With their credit damaged and their credit cards at their limits, they are struggling to pay down their debts. There are no more new clothes, no more trips to theme parks or dinners out. Groceries are purchased at Costco, and the snack-food budget has been cut completely. They turned the Sequoia in last year, opting to drive a sedan with significantly better gas mileage.
Still, the Tacans can't afford more than the minimum monthly payments on their credit card debts. Some of the credit card accounts cost them interest at annual rates around 20%.
Across America, falling home values have caused middle-class families to cut back on spending.
"I think that you have to find that equilibrium and live within your means," says Jeff Podoshen, an assistant professor of marketing at Franklin & Marshall College. Last summer, he and his wife bought a home outside Philadelphia. "We want to make sure that we are not caught in the situation that some of these other people in America find themselves in . . . because they have overextended themselves."
The Podoshens are fortunate. They take in more than $100,000 a year. He explained that they have not cut back on all luxuries. But he shops at outlets rather than department stores. He buys groceries at Trader Joe's rather than the more expensive Whole Foods Market. He has invested in do-it-yourself home insulation in hopes of saving money on heating costs.
The new emphasis on saving and paying down debt makes a lot of sense for individuals in the long run, but it could damage the nation's economy deeply in the short run. Economists call this conundrum the paradox of thrift. Threatened by the prospect of lower wages and less confident about their jobs, people save more and spend less. That weakens the economy, reduces revenue to businesses and causes businesses to cut back on employment. Whereupon a new wave of anxiety sets the cycle in motion again.
Princeton University economics professor Harrison Hong says business leaders have no choice but to cut back in the face of consumer thrift.
"The basic urge of people is that they are making decisions on demand. If they see that there is not going to be a lot of demand, they are not going to be spending a lot," says Hong. "That is the vicious cycle."
Ana Tacan would spend more if she had the money. Asked what she would do with a proposed $800 tax credit for families, Tacan said she would buy her two teenage girls a couple of seasonal clothing items. The family didn't do much shopping for the winter.
The tax credit wouldn't put much of a dent in the family's debt. But Tacan is hopeful that government programs may offer aid for families with mortgage problems or damaged credit.
"I am just hoping there will be some kind of assistance to the families that have lost their homes or have problems because of their homes and need to re-establish their credit again," she says.
Indeed, there is reason for hope on that front. The new economic stimulus package also includes aid for new homebuyers, a feature that may help stop the decline in housing prices. First-time homebuyers will get a tax credit of $8,000 if they buy by Dec. 1.
Tacan hopes she and her husband will eventually be able to take advantage of a similar tax credit. Despite their recent disappointments, she wants to one day own a house again.
"The purchase of a home is still the greatest thing to do," says Tacan.
Produced by Darragh Worland
Published Feb. 19, 2009
