American Nightmare: Top 10 Cities for Foreclosures

If you drive 32 miles east of Reno, you'll find Fernley, Nevada. The city that limits its dog count to three per address and speaks out about the effects of graffiti on its Website has troublesome news to digest. It has the nation's highest foreclosure rate through August.

While the great recession has wreaked havoc on numerous local economies, Fernley has been the hardest hit. The city has seen more than 3,500 foreclosure filings over a 12-month period among its 17,900 housing units, according to Realty Trac, an online service that collects and aggregates foreclosure data.

It's been an awful time for the real estate market, which was only made worse by recent news. August was the toughest month for homeowners as lenders swooped in and seized more than 95,000 homes across the United States, according to Realty Trac.

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Is the worst over yet? The foreclosure rate is up 25 percent since August 2009, and the dream of homeownership has turned sour for many who owe more on their homes than they are worth or can't pay their mortgage

"I don't think we've seen the worst of it yet," says Lisa Johnson-Sevajian, vice president at Coldwell Banker Andover, about what she calls the "American drama." But, "there is a lot of opportunity for first-time homebuyers to get in and create an investment for themselves," she added.

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Efforts by the government to stem the tide of foreclosures have had mixed success. The Obama administration's main anti-foreclosure program touched a 10-month low in August with 33,000 homeowners receiving assistance. The president said in 2009 that as many as 4 million homeowners would be helped, and about 449,000 have thus far received assistance to avoid foreclosure.

For buyers looking to get in on record-low mortgage rates and a glut of choices, the process requires more than a glance at raw data. "If you're looking for a good neighborhood, you're looking at prices, the local system and the type of people you will associate with," says Jay Butler, associate professor of real estate at Arizona State University.

A town can have "stunningly beautiful houses and they're only worth $100K because there are no real jobs. People can't live [in certain towns] because there are no jobs," says David Reiss, a professor of real estate law at Brooklyn Law School. "A home's real value is related to the local economy."

The economy has seen crippling job losses that have left more than 14 million people unemployed. "I have seen the American dream dead before," says Butler. "It happened in the 60s and 80s but it always recovers." The dream is not dead, according to some real estate specialists. If anything, he says, "the American dream has been broadened. The home is the center of many families. [When you picture a home] you're seeing where the swing and the Christmas tree is going to go, it's an emotional decision" that will once again be important.

To avoid another housing meltdown, we must consider that for some "renting is a better option," says Reiss. "There are a lot of wonderful things [about the American Dream] but we have seen, in the last 15-20 years, an unthinking pushing toward homeownership." In fact, Reiss argues that offering incentives for homeownership , such as mortgage interest deductions for some homes, is not defensible as the "American Dream."

"We should understand that owning a home does not cause the American Dream to be fulfilled ? rather, it is a consequence of the American Dream being fulfilled," says Reiss. "We should do less to incentivize home ownership at all costs and more to create our self-sufficient citizenry."

For a snapshot of homeowners losing the dream, we asked Realty Trac for housing data over a 12-month period.

Here are the Top 10 Cities Under Siege:

1. Fernley, NV Foreclosure Rate: 1 in 5 homes Housing Units: 17,947 Unemployment Rate: 16%

2. Las Vegas-Paradise, NV Foreclosure Rate: 1 in 6 homes Housing Units: 788,094 Unemployment Rate: 12%

3. Pahrump, NV Foreclosure Rate: 1 in 6 homes Housing Units: 16,600 Unemployment Rate: 14%

4. Modesto, CA Foreclosure Rate: 1 in 8 Homes Housing Units: 173,590 Unemployment Rate: 16%

5. Merced, CA Foreclosure Rate: 1 in 8 Homes Housing Units: 83,091 Unemployment Rate: 17.2%

6. Cape Coral-Fort Meyers, FL Foreclosure Rate: 1 in 8 Homes Housing Units: 360,036 Unemployment Rate: 12.4%

7. Stockton, CA Foreclosure Rate: 1 in 8 Homes Housing Units: 226,644 Unemployment Rate: 15.4%

8. Riverside-San Bernardino-Ontario, CA Foreclosure Rate: 1 in 8 Homes Housing Units: 1,436,332 Unemployment Rate: 13.3%

9. Bakersfield, CA Foreclosure rate: 1 in 9 Homes Housing Units: 268,989 Unemployment Rate: 14.4%

10. Vallejo, Fairfield, CA Foreclosure Rate: 1 in 9 Homes Housing Units: 149,830 Unemployment Rate: 10.9%

*Housing Data is based on research by Realty Trac, and unemployment figures come from annual 2009 rates.