The Vanishing Middle Class, Part 3: Just Getting By On $150K

The collapse of the housing market has left a trail of economic ruin and financial insecurity for millions of working families.

Among those left in rocking in its destructive wake are Ryan and Kim Payne of Sherborn, Mass., an upscale suburb about 25 miles west of Boston. The Payne's home provides a poignant snapshot of middle class life in America at the start of the 21st century. At first glance, they look like a young family enjoying a generous slice of the American dream.

Ryan is 27 years old. Kim is 36. Their two kids, Ryan Junior and Olivia, are two-and- a-half and one. The Payne's house is a nice one: three bedrooms, two baths, a family room, a modern kitchen — with granite counters and a Sub-Zero refrigerator — and a big deck that overlooks a leafy back yard in a large wooded lot.

"We bought here knowing that if we ever did want to move we wouldn't lose the value," says Kim Payne. "We have a good school system. And we could afford it at the time."

The Paynes work hard to make all this possible. Kim is a dental hygienist. Ryan is a police officer in the neighboring town of Natick, where he works the night-shift — midnight to 8 am. And to afford this piece of the American dream, he also works as many extra shifts as he can.

"I usually work 70 hours a week right now, " Ryan says. That leaves very little time for the couple to spend together. In fact, Kim says flatly, "There is no time!"

The Paynes are working harder than ever — but they're struggling to stay afloat — which might be surprising, because they are certainly not poor. Kim earns $80,000 a year. Ryan earns at least $70,000. The median annual income for a family of four in Massachusetts is nearly $90,000, so by that measure the Paynes are comfortably middle class. So why are they struggling? Ryan and Kim both grew up middle class, and they expected their lives to get easier — not harder.

"I think I had the expectation of being able to get by," says Kim. " And I was for a while." And According to Ryan, their problem is not that they're poor — it's that they have too many bills.

"If we didn't have all these bills we'd probably be considered upper middle class," he says with a weary tone is his voice.

Among the biggest expenses squeezing the Paynes is day care for their two kids, which costs them $3,000 a month. Then there's the rising cost of just about everything else.

Baby formula was costing them about $120 per month. Their weekly food bill is up to $180 a week and seems to keep climbing. And although the price of oil is dropping now, it was a heavy burden last winter.

But what has really pushed the Paynes to the bring of financial ruin is their house. They bought it three and a half years ago for $640,000 — just before the real estate bubble burst. They put $10,000 down, and moved in with a $630,000 fixed-rate mortgage of about $4,000 a month. At first, they managed. Then, there were two pregnancies and two maternity leaves that diminished their income dramatically. Then, bad news came from the mortgage company.

"We actually got a letter from them," Kim explains. It said, we improperly escrowed your taxes, and we made the error, and it's our fault, but we need to collect this now."

Because of that error, the mortgage company insisted on collecting an extra $900 a month for an entire year. Then the mortgage company told them they miscalculated their monthly payment, and tacked on another $500 a month, which caused the Paynes to fall behind on their payments.

"We might never have bought three years ago knowing that our payment was going to be that much more," Ryan says. "We just had so many things happening all at once."

So the Paynes decided they had to sell — but they can't. The house has been on the market for more than a year, and the value has dropped so much they now owe more than it's worth. So they're stuck. And to make ends meet, they rely on their credit cards, and have piled up a staggering amount of debt, which Kim says is somewhere between $25,000 and $30,000. And because they've fallen behind on their bills, they damaged their credit rating, and Ryan Payne says they have been unable to negotiate a lower monthly mortgage payment.

"We've talked to three different mortgage people," Ryan says, "and they all say we don't qualify because of how much we make, our [bad] credit rating, and the size of our loan. They won't let us do it."

So, like millions of middle class families snared in the collapsing real estate market, the Paynes are trapped. The real estate bubble, predatory lending, and rising prices are all to blame. But arguably, so are the Payne's choices.

For decades, middle-class Americans have felt entitled to their aspirations; to work hard, and then to enjoy the fruits of their labors, and expect to do better than their parents. But does that mean a young family needs a $640,000 house? What happened to that other middle class American value of living within one's means?

Kim Payne acknowledges that maybe they simply bought too much house. But, she says, she never anticipated all the other expenses — especially for child care.

"I mean, we never predicted $3,000 a month," she says. "Never imagined that!"

Elizabeth Warren, a professor at the Harvard Law School who studies bankruptcy and the credit industry, says, it's easy for people who bought homes years ago to look at people like the Paynes and "just sneer at them."

"How bad could your decisions be?" she asks.

But Warren says that before judging families like the Paynes, it's important to recall what it was like in places like Massachusetts just three or four years ago — when real estate agents were telling young first-time buyers like the Paynes that housing prices were only going to go up and up. At the same time, they were offering mortgage money at low, low rates.

"And the real point was," says Warren, "if you wanted to raise your kids in a home, in a good school district, this is the price. And if you don't want to pay it, somebody else does. These are people who were trying to buy a life for their kids that they thought was ordinary and middle class."

Warren says, for millions of American families, debt — of all kinds — is now the big risk — threatening their stability and contributing to a growing sense of financial insecurity. And she says the Paynes' crippling mortgage is a case in point.

"Back in 1978, mortgages had an incredibly low default rate," Warren says. "And the reason was that banks didn't lend to anyone who couldn't put down about 19 percent of the purchase price." So families were able to buy homes, build up equity, and over time, the portion of their paycheck that had to go toward housing was actually declining.

"Well, we reversed that one over the last eight years with this incredible housing bubble," says Warren.

Then there's credit card debt, and again, the Payne family is a case in point — with as much as $30,000 of debt. According to CardWeb.com, which tracks the credit card industry, the average American household owes more than $10,000 in credit-card debt — up more than 300 percent since 1990. Warren says the Paynes are among some 50 million Americans who can't pay off their credit card bills. At the same time they are struggling to cope with a bigger mortgage and higher health insurance and child care costs.

"And then we hit them — on average --with about $1,650 in interest and fees on their credit cards," says Warren. "And think about that. That's $1,650 every year that wasn't used to buy socks and haircuts, that wasn't used somewhere in the economy, that wasn't put into savings. It is money that just disappears."

So what are people like Ryan and Kim Payne to do? They are not sure, but they have begun to seriously consider filing for bankruptcy. It is a route they never imagined they would be forced to take, but Ryan says it might be their only recourse.

"It's not an option we want," says Ryan, "but it's also an option that [may be] inevitable. If we can't afford it, we can't afford it. What else can you do?'

More than a million families — many of them middle class homeowners like the Paynes — will file for bankruptcy this year, up almost 30 percent since last year. Bankruptcy may be the only way for the Paynes to protect themselves — but it wont be easy. At the behest of the consumer credit industry, Congress has made it harder and more costly to file for bankruptcy protection. So families like the Paynes are facing rising prices for the basics like food, day care and health care; the mortgage crisis, collapsing home values, rising credit card debt — and less protection.

Warrren says it's no wonder that so many working families feel more anxious these days.

"They really are in worse financial shape," Warren says. "Not just a few families who went a little crazy, but across the whole wide middle swath of America."

Warren says working families have been hit by what she calls "a one-two punch:" stagnant or declining incomes and rising costs for basic expenses: health insurance, child care, gasoline, even home mortgages.

"So these big core things that families are spending on," Warren says, "have shot way past inflation, and are now chewing up a larger part of Americans' budget."