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By contrast, he said, he can’t even get his bank to talk to him about refinancing, because he’s made his payments diligently. And in a year and a half, his loan will reset to a variable rate, and he’ll be at the mercy of the market. “We love the house; I can’t say I love the community. The community is just very different from what we thought we were getting into. I have a Ph.D., my wife has a master’s. We were expecting to be among our peers. We’re not. Most of the people here will be lifelong renters. That’s not the community we moved into.”

In 2008, Spector and Bridgewater’s other board members had video surveillance cameras mounted outside their front doors. “I’ve had death threats,” Spector told me. “I had someone show up at my front door with a gun because his truck had been towed away. Another guy showed up with a claw hammer.” He told me he worked “constantly” to try to keep the neighborhood from slipping—“it’s my second full-time job.” He’d logged 4,500 cell-phone minutes the prior month on association business, many of them spent talking to an attorney about various motions. “I’ve lost five years of my life to this,” he said. “It’s just a battle against everything.”

“I do this because my family has to live here,” he said, “and I don’t want gunfire on the streets. That’s what I get out of this—knowing that if I have to travel on business, my house isn’t necessarily going to be robbed.” But you can see it’s more than that. Resignation still seems to vie in him with the unextinguished hope that somehow, if
he works hard enough, he can restore the community to something approximating what he imagined when he moved in—and also turn back the clock on neighborhood home values. “What I would love to do is get to a point where I can refinance my house, you know?”

The last time I spoke with Spector on the phone, he had to go abruptly. He’d just received a call on the other line; a neighborhood resident had pulled a gun on a contractor who works for the association. Spector had to go meet the police, who were on their way.

O
NE SHOULD NOT
overestimate the extent of
middle-class status anxiety today. A Pew study released in June 2010 revealed that 71 percent of the self-described middle class felt that their class status was secure, and 70 percent—a higher percentage than in either the lower or upper class—believed that America is still a land of prosperity and economic progress. Asked whether their living standard was higher than that of their parents at the same age, a majority of middle-income Americans (though a relatively small majority, at 58 percent) said yes.

Many of those who’ve lost their job and are now experiencing downward mobility must feel differently about these questions. But while the Great Recession has accelerated the hollowing of the middle class, the unemployed—along with those who’ve found new, but much lower-paying, work after a job loss—are still in a distinct minority. Most of Middle America has so far felt the recession primarily through its impact on home values.

The housing bust has of course weighed more heavily on some families and communities than on others; Bridgewater is an extreme case. People who bought long ago in established, upscale suburbs are typically still on high, dry ground, enjoying neighborhoods and schools as good as ever, or nearly so. Likewise, people who took advantage of an inattentive mortgage industry at the height of the bubble—putting no money down on houses they could not afford
and depending on an ever-rising market to bail
them out—have lost little. It’s the people in between—younger, moderately educated families in starter homes on the suburban fringe; striving minorities in fragile neighborhoods who took subprime loans at the bubble’s height; middle-aged couples who’d come to rely on home equity to spruce up unglamorous lives—who’ve been knocked flat.

Some of the optimism that can still be found in the suburban middle class today, particularly outside the worst-hit communities, seems justified. Particularly for people with four-year degrees from good colleges living in nice neighborhoods around dynamic cities, the future, in the long view, looks bright.
But middle-class optimism also seems to stem from another source: the persistent, widespread belief that housing values will soon start appreciating again, and rapidly. A 2010 Pew survey revealed that 80 percent of Americans believed owning a house was the best long-term investment a person could make.
According to Fannie Mae’s Fourth Quarter 2010 National Housing Survey, 66 percent believed it was a good time to buy. Asked to name “safe” investments, 64 percent of homeowners checked “buying a house” (for comparison, 77 percent listed putting money into a savings account). More than one in three homeowners, when describing the “major” reasons to buy a house, checked “it gives me something I can borrow against if I need it.”

The housing bubble during the aughts was unprecedented in American history; there has never been a run-up that even comes close to it. At a minimum, it is unlikely to be repeated.
In their analysis of the economic aftershocks of more than a dozen major post–World War II financial crises worldwide, Carmen Reinhart and Kenneth Rogoff found that housing values typically keep falling for longer than anyone might initially suspect—for six years, on average, and by a total of 35 percent.
In Japan—an extreme case—housing never recovered from the crisis that began in 1991; residential urban land prices have declined in every year since then, and in 2009 were 44 percent below their peak value. In recent years, the
New York
Times
has taken to running stories of dispirited Japanese homeowners who’ve held on throughout, and are now finally selling at half or a third of what they paid long ago.

The optimism and future orientation of the middle class have always been among America’s most precious assets, ensuring social peace and underlying the nation’s astonishing capacity for reinvention. The connection of that optimism to magical thinking about housing, from as early as the 1980s straight through to the present day, is deeply troubling.

Middle-class culture is changing in the wake of the recession.
Evidence of a growing financial and personal conservatism can be found in the nation’s personal savings rate, which rose from about 2 percent of disposable income in 2007 to more than 5 percent in 2010.
As it relates to housing, however, the gambling spirit of the middle class has not been fully exorcised. In Cleveland, masses of houses sit vacant and boarded, ruined by squatters or mold or the elements. But as Alex Kotlowitz wrote in the
New York Times Magazine
, that hasn’t stopped investors and speculators from as far away as California from buying them by the dozen on eBay, at a few thousand dollars each, sight unseen.

In Las Vegas and Phoenix, a few builders are already raising new subdevelopments out beyond the old, half-empty ones—and finding demand for them. “Our customers wouldn’t care if there were fifty homes in an established neighborhood of 1980 or 1990 vintage, all foreclosed, empty, and for sale at $10,000 less,” said Brent Anderson, a marketing executive with Meritage Homes, to the journalist David Streitfeld. “They want new.” In 2010,
under a pilot program called Affordable Advantage, several states began offering mortgages for $1,000 down, then selling them to Fannie Mae. “With only $1,000 down, affordable monthly payments and no private mortgage insurance required,” read one ad, “the dream is closer than you think.”

The Fannie Mae program was quickly halted; the federal agency that oversees Fannie Mae had never approved it. But none of these other, private initiatives appear likely to end well. Houses are not
magical assets; basic logic dictates that over the long haul, they simply cannot appreciate faster than the incomes of the people expected to buy them. So what will happen when the nonprofessional middle class finally and fully awakens from its dream of financial security through rising home values? One of the biggest imperatives the nation faces in the years ahead is making sure its middle class retains its sense of optimism and opportunity. Ultimately, housing is too flimsy a foundation upon which to build that ethos. We need to replace it with one that is sound.

I
N
O
CTOBER 2005,
THREE
C
ITIGROUP ANALYSTS RELEASED A REPORT
describing the pattern of growth in the U.S. economy. If you really wanted to understand the future of the economy and the stock market, they wrote, you first needed to recognize that there was “no such animal as the U.S. consumer,” and that concepts such as “average” consumer debt or average consumer spending were highly misleading.

In fact, they said, America was composed of two completely distinct groups: the rich and the rest. And for the purposes of investment decisions, you needed to simply ignore the second group; the masses didn’t matter, and tracking their spending habits or worrying over their savings rates was a waste of time. All the action in the American economy was at the top: the top 1 percent of households earned as much each year as the bottom 60 percent put together; they possessed as much wealth as the bottom 90 percent; and with each passing year, a greater share of the nation’s treasure was flowing through their hands and into their pockets. It was this segment of the population, almost exclusively, that held the key to future growth and future returns. The analysts, Ajay Kapur, Niall Macleod, and Narendra Singh, had coined a term for this state of affairs:
the plutonomy
.

In a plutonomy, Kapur and his coauthors wrote, “economic growth is powered by and largely consumed by the wealthy few.” America had been in this state twice before, they noted—during the Gilded Age and the Roaring Twenties. In each case, it was a result
of rapid technological change, global integration, laissez-faire government policy, and “creative financial innovation.” In 2005, the rich were nearing the heights they’d reached in those previous eras, and Citigroup saw no good reason to think they wouldn’t keep on climbing this time around. “The earth is being held up by the muscular arms of its entrepreneur-plutocrats,” the report said. The “great complexity” of a global economy in rapid transformation would be “exploited best by the rich and educated” of our time.

The report was a hit with investors, prompting a series of follow-up papers on how to craft an investment portfolio to take advantage of the plutonomy (the answers generally involved buying shares in the makers of luxury goods). In the fall of 2006, Citigroup held a conference on the topic, which was summarized in a report titled “The Plutonomy Symposium—Rising Tides Lifting Yachts.”

Kapur and his coauthors were wrong in some of their specific predictions about the plutonomy’s ramifications—they argued, for instance, that since spending was dominated by the rich, and since the rich had very healthy balance sheets, the odds of a stock-market downturn were slight, despite the rising indebtedness of the “average” U.S. consumer. Nonetheless, their overall characterization of the economy remains trenchant. The rich continue to dominate as they seldom have before.

In 2007,
on the eve of the recession, the top 10 percent of American families made half of the nation’s personal income, according to the analysis of Emmanuel Saez, an economist at the University of California at Berkeley. The top 1 percent—people with a family income of roughly $400,000 or more—earned 23.5 percent. Since 1993, this tiny minority has captured more than half of all income growth in the United States, and its share has been growing. Between 2002 and 2007, out of every three dollars of American income growth, one was divided among the bottom 99 percent of workers. The other two went to the top 1 percent. And even within the top 1 percent, incomes were heavily concentrated among the superstars at the very top of the distribution. The top one-tenth of 1 percent—mostly
business executives and financiers—earned at least $1.7 million in 2008, and their incomes have grown faster than anyone else’s.

Income inequality usually shrinks during a recession, but in the Great Recession it hasn’t. From 2007 to 2009, the most recent years for which data are available, it widened a little.
The top 1 percent of earners did see their incomes drop more than that of other Americans in 2008. But that fall was due almost entirely to the stock-market crash, and with it a 50 percent reduction in realized capital gains. Excluding capital gains, top earners saw their share of national income rise even in 2008. And in any case, the stock market has since rallied.
Corporate profits have marched smartly upward, quarter after quarter, since the beginning of 2009, and executive incomes have risen with them.
According to
Forbes
magazine, in 2010 the net worth of the 400 wealthiest Americans rose about 8 percent, to $1.37 trillion collectively—still down a bit from its 2007 high of $1.54 trillion, but higher than it had been in 2006.

Even in the financial sector, high earners have come back strong. In 2009, the country’s top 25 hedge-fund managers earned $25 billion between them—more than they had made in 2007, before the crash. That same year, Goldman Sachs also made more money than ever before, and paid out more than $16 billion in salaries and bonuses. In 2010, payouts were expected to rise to $17.5 billion.
The crisis may have begun with mass layoffs on Wall Street, but the financial industry has remained well shielded compared with other industries; from the first quarter of 2007 to the first quarter of 2010, finance shed 8 percent of its jobs, compared with 27 percent in construction and 17 percent in manufacturing. Throughout the recession, the unemployment rate in finance and insurance has been substantially below that of the nation overall.

“
Finance Firms Rev Up Hiring,” announced the
Wall Street Journal
in June 2010, when the national unemployment rate stood at 9.5 percent: “ ‘War for Talent’ Intensifies; Staff in Areas Such as Commodities Are Getting Offers Up to 40% Higher Than a Year Ago.” By then, Manhattan’s whole economy was in the midst of a sharp rebound
(while New York City’s less affluent outer boroughs remained troubled). The city’s most exclusive restaurants were fully booked again by August, and sales at Tiffany & Co. on Fifth Avenue were up 16 percent on the year.