America needs to change how we think about housing
Ever-increasing home values are a Ponzi scheme
There is one big thing wrong with the American dream of owning one's own home: the price.
Now that the pandemic is easing across much of the country, prices are skyrocketing — just like at the peak of the housing bubble, houses are being snapped up for well over the asking price in a matter of hours. The Case-Shiller home price index saw an annualized growth rate of 13.3 percent in March, the highest figure in more than seven years.
All this is a consequence of the American idea, and the goofy system we've constructed to prop it up, that homes are a form of wealth that must get more valuable over time. It's a bad system that should be overhauled.
Most Americans take it for granted that home prices should generally go up. But if you think about it for a moment, there is no inherent reason to expect this. A land with a house on it does not somehow increase in productivity to produce more housing, like a share of Apple generally does with smartphones. It's just a pile of concrete, steel, wood, bricks, and so forth that slowly falls apart over time. Buying a house ought to be roughly analogous to buying a car — a thing that (with rare exceptions) decreases in value over time, because it wears out. Indeed, that is how it works in countries like Japan.
But this doesn't happen in the U.S. because of government policy that heavily influences both supply and demand. On the demand side, a complex of state-backed institutions underpins the traditional 30-year mortgage (which did not exist before the New Deal in the 1930s). Loan insurance through the Federal Housing Administration drastically reduces the financial risk of mortgage lending, while the companies Fannie Mae, Freddie Mac (formerly semi-private, but owned outright by the government since 2008), and Ginnie Mae buy up loans in the secondary market, which frees up bank capital for more loans. Then the mortgage interest deduction provides another big homeownership subsidy (though it was cut substantially as part of the Trump tax cuts).
All this amounts to a tremendous subsidy for home ownership, which was much more difficult before all this was set up. Back in the 1920s, prospective owners typically had to put up a 50 percent down payment to get even 5-year loans with a "balloon payment" of the entire remaining principal due at the end.
Now, all those New Deal subsidies were not in themselves a bad thing, particularly when home prices were low and many cities had huge room for expansion. But today that is no longer the case — in most places, there are heavy restrictions on construction. In cities like New York, San Francisco, and San Jose, it has become almost impossible to build new homes. Just about every proposed new development faces a year-long legal and political gauntlet of enraged local residents who have a strong incentive to restrict new construction that might deflate their own home's value, which is often seemingly paired with a quiet desire for de facto racial segregation.
Subsidized demand plus restricted supply means prices go up, which has all manner of toxic social and economic side effects. Steadily increasing prices means ownership will be out of reach for a steadily larger share of people who can't come up with the down payment. (Ironically, some Boomers have had trouble getting rid of their ridiculously inflated properties now that they've retired.) Throttling new residential construction also raises rents for non-owners. Skyrocketing prices destabilize neighborhoods, as a great deal of choices about where to live end up hinging on asset speculation.
Finally, turning homes into a profit center diverts investment from things that might actually improve growth — like green energy — and into a non-productive asset class. For instance, in recent years big private equity companies have been getting heavily into single-family homeownership. This is particularly worrisome because of the industry's record of rolling up already-profitable businesses, like ambulances, and extracting even more money with sociopathic ruthlessness (though as Jerusalem Demsas writes at Vox, Wall Street still only owns a small share of the single-family home market). But the bigger problem is so much investment, from both individuals and financiers, going into what amounts to a Ponzi scheme — prices go up only because there is always another sucker behind you in line.
So what is to be done? It's reasonable for individuals to be able to own a home. But it would be far wiser to aim for stable home prices over time, rather than trying to boost middle-class wealth through home price appreciation.
This would require a number of different policies. First, renters ought to get equal policy priority with owners. Rental vouchers ought to be boosted to something like what homeowners get in terms of subsidy, while the worst ownership subsidies like the mortgage interest deduction (almost all of which is claimed by the rich, and mainly produces pointlessly larger homes at the top end) should be removed. Rents should be controlled, which will provide more neighborhood stability, and again level the playing field with owners — after all, the 30-year mortgage functions just like rent control for the middle and upper-middle class.
On the other hand, clearly there is a dire need for more housing supply in hot cities. This could be achieved with changed zoning rules and more new construction (and there certainly is a place for that), but as Saoirse Gowan and myself explain in a paper for the People's Policy Project, a better way is with social housing — state-owned houses and apartments that are open to all comers. New construction is always going to be expensive, and big landlords are always going to aim at the top of the market. Social housing, by contrast, could have units set aside for market-rate, poor people, and middle-income folks. This would provide new housing supply where it is most needed: across the whole income spectrum, from poor to rich.
Additionally, social housing would stabilize the whole housing system. Because almost all of America's housing construction is privately financed, residential investment collapsed after the Great Recession and stayed at record lows for years and years — creating a huge shortage of homes and apartments. Now that many younger people are (finally) flush with cash thanks to pandemic savings and rescue payments, there are not nearly enough homes to buy, and the home construction industry — which was devastated by the prolonged housing downturn — is scrambling to put itself back together.
That's just a sketch of the needed policies. But this would also require a major change in mindset. For decades Americans have been taught that homes are a sensible investment and that the most responsible thing to do housing-wise is save up for a down payment. This is a fiction that requires a vast and troublesome policy architecture to maintain. Far better to say that if you want to buy, after paying off a house you'll get out about what you paid into it — and if you'd rather rent, well that's fine too.