In Ohio, dashed dreams and a housing hangover by David Whitford @FortuneMagazine March 6, 2012, 10:02 AM EDT E-mail Tweet Facebook Google Plus Linkedin Share icons An abandoned home in Youngstown, OH. “Bad times right now are good times for us,” says Craig Shanower. “You know what I’m saying?” It’s a gray February afternoon on the east side of Cleveland. Shanower is standing outside a three-story house, white with red shutters: 3399 East 105th Street. Four bedrooms, two baths, according to Zillow. Built in 1910. Last changed hands, for $94,911, in March 2006. It’s empty now, has been for years, and this afternoon it’s coming down. “We did 185 houses last year and this year we’re hoping to double that,” says Shanower, who operates a shovel-truck for Cherokee Demolition, which has a lucrative contract with the city. In a growing city, urban pioneers might take look around here and see promise. Cleveland is not growing; between 2000 and 2010 its population fell more than 17%. “We have too much supply,” says former Cuyahoga County treasurer Jim Rokakis, “and not nearly enough demand.” Hence the hard-nosed calculation, promoted by Rokakis in his new role as director of the nonprofit Thriving Communities Institute, that the path forward begins with destruction. Ohio will get some help with that from the $25 billion national mortgage settlement reached last month with Ally Financial, Bank of America BAC , Citigroup C , J.P. Morgan Chase JPM , and Wells Fargo WFC : the state’s share includes $75 million to tear down houses. It’s not nearly enough—Rokakis has been telling the feds that for $1.5 billion he could wipe all of Ohio and Michigan clean—but it’s a start. Shanower is up in his cab now, unflexing the long, yellow arm of his machine, clawing at the house almost tenderly. Front walls first, then the floors, then the side walls, then the back. The basement fills with rubble. It only takes about an hour. America’s hard shift Ohio—the biggest, most hotly contested prize on Super Tuesday—may not be where your mind goes when you think about the real estate bust. Quarter by quarter, from early 2003 through the end of 2006, Ohio had more foreclosures than any other state on the country. That was during the first wave of misery to befall the housing market. It wasn’t about beachfront condos and desert subdivisions where the foolish and the greedy made ill-timed bets. It was predatory lending. Forensic investigators can show you maps of the devastation that reveal the very paths the loan makers trod, up one street and down the next, offering fast money to fix the roof and consolidate credit card bills in one easy payment. That wave has subsided somewhat—Ohio currently ranks 8th for foreclosures—but the consequences endure. Today in Cleveland’s Cuyahoga County there are about 26,000 vacant homes. Come here (or to Detroit, Youngstown, or Dayton) and you can observe the beginnings of a hard shift in America. A place where the vast pool of middle-class wealth began to evaporate. Where cash drawn from the well of homeowner equity—a flow that kept consumers spending and the economy humming, even as jobs disappeared and incomes plunged—eventually ran dry. Where a piece of the American dream died. MORE: Obama’s plan to win Ohio If you watched the State of the Union address this year, closely, and you knew where to look, you might have caught a glimpse in the gallery of Les Kuglics, an ordinary, middle-aged American from Green, Ohio. Kuglics was there as a guest of his Congresswoman, Betty Sutton, a Democrat who represents Ohio’s 13th District. Though Kuglics calls himself an independent and admits he has enjoyed listening “in the past” to Rush Limbaugh and Sean Hannity, he did like what the President had to say about “changing tax laws to favor companies that stayed home to manufacture, not the ones that went overseas.” That’s a topic Les knows something about. Les and Donna Kuglics A week later I had dinner at a restaurant in Green with Les and his wife, Donna, who had not made the trip to Washington. (There was only one ticket; she encouraged him to go). The Kuglicses are not the kind of people to give vent to extreme feelings of any kind, much less betrayal or outrage. Both were raised in working-class neighborhoods in nearby Akron. During the 32 years that they have been married, Les has had three main jobs and been laid off twice. He was eight years in the testing division with General Tire, and 23 years as a hardware field engineer with Hewlett-Packard. (The year before Les was downsized at HP, CEO Mark Hurd collected more than $26 million in salary and bonus.) Since 2009 he has had a desk job in the maintenance department of a small private-jet company. Donna has always worked in accounting, though she doesn’t have a college degree. After he was laid off the first time, Les went back to school and earned the associate’s degree that qualified him for a job in computers at HP HPQ . “He is a hard worker, who dedicates his time and ability to performing his job with high standards and pride,” says his proud wife. But with each new job Les has taken, the family has had to adjust initially to a lower standard of living. They raised two children. Emily, who graduated from college last spring, works with autistic children. Matthew joined the Air Force in 2000, straight out of high school. Because he was only 17, he needed his parents’ consent. They gave it reluctantly, and only after Matthew promised to save one paycheck per month and find a way to attend college—promises he faithfully kept. After 9/11, things got serious. Matthew did two tours in Iraq, and it was during the second, on a cool, windy morning in early June 2007—a day Les happened to be working at home and had just gotten off a conference call—that “the knock came.” Special Agent Matthew Kuglics, whose birthday is Memorial Day, had just turned 25. “I will be honest and say in the beginning the only reason I got out of bed in the morning was for my daughter, Emily,” Donna wrote to me a few days after our meal together. “If not for her, I don’t think life would have mattered. As time has passed, I realized I also continued on for Matthew. He would have been extremely disappointed in me if I would have given up. Les continues to struggle in a way I cannot understand, a father losing his only son. The struggle continues with regard to the physical and mental toll this has taken on us. Whether it can be diagnosed as PTSD or just plain grief, I am not sure. As a family we press on.” MORE: Throwing cash at the housing market will make it worse Shortly before Matthew left on his final mission, he bought a new three-bedroom house on a cul-de-sac in a subdivision near Lackland Air Force Base in San Antonio. The oversize lot with a stockade fence around it was for his dog, Hunter. The bedroom with the biggest closet was for Emily, who he hoped would enroll at nearby St. Mary’s University in the fall and live with him while she went to college. Though he did have some savings, Matthew chose to put no money down and roll all the closing costs into the loan. Donna didn’t think that was a good idea. In 1987 she and Les had borrowed money to buy three-quarters of an acre in Green, and only after they had paid off that loan completely, three years later, did they borrow money again to build a house. But Matthew insisted on doing things his way. His plan was to pay off the mortgage in chunks with the bonuses he earned each time he deployed. In their grief, Les and Donna put the house up for sale. Bad timing. Matthew had bought in November 2006. In the nine months since then, the market had peaked and begun to fall. New houses were still going up in the subdivision even as existing ones were sitting unsold. Matthew’s insurance money had gone to Emily to pay for college. His modest estate was bottled up in probate. Though the Kuglicses were hard-pressed to come up with the $1155.10 monthly mortgage payment, and weren’t under any legal obligation to do so, Donna insisted on paying it anyway. That fall, with help from a real estate agent in San Antonio, the Kuglicses say they found a buyer for Matthew’s house who was willing to pay $125,000 — about $10,000 less than the balance on the note. That meant the mortgage-holder, Chase, would have had to approve a short sale. Surely somewhere inside Chase sat a reasonable banker willing to work out a deal with the parents of a dead soldier who were trying to do right by all concerned. But according to the Kuglicses, despite repeated phone calls, that banker was impossible to find, and eventually the buyer went away. (A spokesman for Chase disputes the Kuglicses’ account, saying the bank tried to work with the broker to help the family arrange a short sale, and that its records indicate there was never any offer made.) Finally a lawyer working pro bono for the Kuglicses persuaded Donna that the only way to get the bank’s attention was to stop writing checks. MORE: Why JPMorgan Chase has become a Wall Street laggard “That house was something that he was very proud of,” Donna says. “It was a huge accomplishment for somebody his age. And just letting that transaction and that part of his life go like that was not …” Her voice trails off. “No. I feel like I let Matthew down on that one. That was hard. It was really hard.” In August 2008, Chase foreclosed on Matthew’s house. It sat vacant for four more months, until finally it sold, together with Matthew’s appliances, for $98,000. The buyer won, I suppose, but Donna lost, and so did the bank. “There are so many problems in this country that need to be fixed,” Les says, “and so many people are hurting. People are going to say, ‘You know what, we’re fed up, we’ve had enough. It’s time to take this country back, and get rid of all this greed and disparity.’” Listening to her husband, Donna nods in soft agreement. “I just want the real America back,” she says.