Nov. 3 (Bloomberg) -- Kajal and Vishal Dharod paid $559,000 in 2006 for a new four-bedroom house built in Rancho Cucamonga, California. Today, it’s worth about $360,000.

“We don’t know how we can come back from a loss like that,” said Kajal Dharod, 29, a first-time homeowner with a $4,200-a-month mortgage. “Buying the house was a mistake.”

American homeownership, once considered a path to wealth, is now leading to disillusionment. Home prices in the last four years have been the most volatile on record, swinging from a gain of 12 percent in 2005 to an estimated 13 percent loss this year, according to the National Association of Realtors. Those gyrations have embittered many property owners and potential buyers, said Nicolas Retsinas, director of Harvard University’s Joint Center for Housing Studies in Cambridge, Massachusetts.

“We always talk about homeownership as being the American dream, but during the last decade people forgot it’s shelter and started thinking of it as a fast way to make or lose money,” said Retsinas. “The quicker we move back to seeing real estate as a place to live, a place to put down roots, the quicker the housing recovery will strengthen.”

Home-price growth in the next decade probably will average about 3.5 percent a year, based on Retsinas’s estimate of increases of about 1.5 percent above inflation and the Federal Reserve’s long-term inflation forecast of about 1.7 percent to 2 percent. On that basis, it could take a decade or more for the Dharods to recover from the 36 percent loss on their home.

Cities Gained

While median home prices increased 83 percent in the decade preceding the recession, according to the National Association of Realtors, the gain was far higher in the most populous cities. In New York, prices increased 146 percent. In San Francisco the jump was 160 percent, and in Los Angeles it was 205 percent, according to S&P/Case-Shiller Home Price indices.

Even in cities where the increases weren’t as steep, the U.S. embraced the idea of the “ownership society” advanced by former President George W. Bush in speeches including his 2005 inaugural address at the apex of the housing boom.

As homeowners watched real estate values surge, many began using their residence for debt repayment, college tuition, or vacation money, said Mark Goldman, who teaches real estate courses at San Diego State University. Homes became the linchpin for retirement planning, he said. The U.S. personal savings rate in 2005 dropped below zero for the first time since 1933, according to the Bureau of Economic Analysis in Washington.

Spending Spree

“Everyone expected their house would increase in value and they could cash out their equity to fuel their spending,” said Goldman.

In mid-2006, home prices began a 28 percent decline after reaching a peak that was almost four times the U.S. median household income. Unable to refinance, subprime borrowers started defaulting on mortgages as their rates adjusted higher and their payments ballooned. The slump in the value of bonds backed by mortgages sparked a global recession.

The U.S. homeownership rate fell to a nine-year low of 67.3 percent in 2009’s first quarter, even after Congress passed an $8,000 first-time homebuyer tax credit in February that was retroactive to Jan. 1. U.S. sales of houses and condominiums dropped to an annual pace of 4.49 million at the beginning of 2009, the lowest on record, according to data from the Chicago- based Realtors group.

“It will be a long time before people think of owning a home as a good investment again,” said John Vogel, a professor at the Tuck School of Business at Dartmouth College in Hanover, New Hampshire. “A lot of what drives housing is psychological, and right now there’s a distinct lack of confidence in real estate.”

Economy Accelerating

In a Sept. 23 statement, Fed policy makers signaled for the first time since August 2008 that the U.S. economy is accelerating. The world’s largest economy expanded at a 3.5 percent pace from July through September, according to an Oct. 29 government report. Household purchases climbed 3.4 percent, the most in two years.

Recoveries aren’t what they used to be. The average increase in the U.S. median single-family home price was about 6 percent in the first year of economic expansion following the last six recessions, using data from the National Bureau of Economic Research and NAR. The 2010 gain in existing home prices is forecast to be 0.8 percent, according to the Washington-based Mortgage Bankers.

More Losses

Fannie Mae and Freddie Mac, the government-run mortgage buyers, are predicting losses will continue. Washington-based Fannie Mae estimates home prices will retreat 1.7 percent in 2010, and McLean, Virginia-based Freddie Mac puts the drop at 1.5 percent.

The U.S. cities with the best prospects for home-price growth over the next five years are Seattle, San Jose, San Francisco and Washington, according to Steve Blitz, president of Pangea Market Advisory in New York, an economic forecasting firm. They have a “scarcity of housing and strong economies,” Blitz said.

Miami, where prices have tumbled 47 percent since a 2006 peak, is No. 5, Blitz said.

“Latin American currencies are going to do very well versus the dollar, and Miami is seen as the capital of Latin America,” said Blitz. “Its long-term economic prospects are good, so its current oversupply will be worked off.”

San Diego

Other cities on his list are San Diego, Phoenix, Las Vegas, Los Angeles, and, at No. 10, New York. While home prices may see additional declines in some of those cities over the next year, their long-term prospects are good, Blitz said.

“If you buy a home in Beverly Hills or an apartment on Manhattan’s Upper East Side, over the next five and even 10 years you are going to do very well,” Blitz said. “The greatest threat to price growth in the New York area would be the diminution of Manhattan as a trading capital, and I don’t see that happening.”

The 10 cities where real estate prospects are the worst, Blitz said, are: Detroit; Cleveland; Milwaukee; St. Louis; Tampa, Florida; Sacramento, California; Indianapolis, Indiana; Atlanta; Columbus, Ohio; and Minneapolis. Some are losing population and others don’t have economies strong enough to absorb an oversupply of available properties.

Gains Return

“It’s not just a question of sales and inventory -- price growth also is based on population patterns, income growth and employment,” Blitz said.

While prospects are grim in some areas, it wouldn’t be the first time prices made a comeback. The median U.S. home value tumbled 39 percent during the 1930s to $2,938 from $4,778 at the start of a decade dominated by the Great Depression, according to the Census Bureau.

Within 10 years the loss was erased, as servicemen back from World War II began buying houses financed with G.I. Bill benefits. The median home value increased to $7,354 by 1950, an average gain of 6.2 percent each year during the 1940s.

In the 1950s, home values surged an average of 15 percent a year, according to the Census. In the 1960s, the pace dropped to 4.3 percent before jumping to 18 percent a year in the 1970s, boosted by a U.S. inflation rate that reached 13 percent. In the 1980s, the average annual increase was 6.8 percent. The pace dropped to 5.1 percent during the 1990s.

Homebuilders Gain

If NAR’s forecast for a median home price of $172,700 this year is correct, it would put the average annual increase at 2.5 percent during this decade even with the collapse of prices.

The Standard & Poor’s Supercomposite Homebuilding Index of 12 companies gained 43 percent from January through Sept. 16 as the homebuyers’ tax credit boosted August new-home sales to a 2009 high. In September, sales dropped 3.6 percent as time ran out to complete homes by the tax credit’s Nov. 30 deadline, the Commerce Department said last week.

Resales rose to a 5.57 million annual rate in September, the highest in more than two years, NAR said in an Oct. 23 report. The median price fell 8.5 percent from a year earlier, 2009’s smallest decrease.

Even so, some Americans who have never held property aren’t convinced that $8,000 from the government will make buying a home a good investment. Mian Raman, 40, said he won’t buy, for now, even though the U.S. tax code provides perks such as mortgage interest as a deduction.

“If I buy a $300,000 home now to get the tax credit and prices drop by even 3 percent next year I’ve lost that $8,000 and more,” said Raman, owner of used-car dealerships in Boston’s Jamaica Plain neighborhood, where he rents an apartment, and Revere, Massachusetts.

Homes as Commodities

No matter how much money the government puts into the housing market to stimulate sales, a recovery won’t be on firm ground until people stop viewing homes as commodities, said Joe Carson, head of global economic research at AllianceBernstein LP in New York.

“After every major bust there is a rethinking of that asset class,” Carson said. “I think people will change their views about real estate and begin to look at it as a long-term investment that provides shelter, rather than a way to make a quick buck.”

After losing almost $200,000 in the value of her home, Dharod in Rancho Cucamonga said she has had many sleepless nights.

“We should have rented an apartment rather than doing what we thought was the right thing and putting everything we had into the house,” Dharod said.

To contact the reporter on this story: Kathleen M. Howley in Boston at kmhowley@bloomberg.net.

Last Updated: November 3, 2009 00:01 EST