I am deadly serious when I say "The best way to build a permanent underclass is to prevent people from getting on the first rung of home ownership." This result is apparent to anyone who chooses to look.*
From The New Atlantis, Summer 2025 edition (Aug. 28):
U.S. housing policy claims to promote homeownership. Instead, it encourages high prices, sprawl, and NIMBYism.
Big government, not the free market, is the reason the suburban single-family home has become the symbol of the American lifestyle.
Across the United States, it is functionally illegal to build housing like what you find on Elfreth’s Alley, Philadelphia, one of the most photographed residential areas in the country, famous for its gorgeous row houses in the middle of the city. At the same time, the federal government subsidizes the construction of McMansions in greenfield locations miles from the nearest town center.
Thanks to incentives to take out large long-term mortgages, for many buyers the key consideration in buying a house is how well it can store and generate financial value — overriding considerations like location, amenities, and beauty.
Here’s how the system, the American system, works: First, the state or city defines the standard product, through zoning and other rules. The product is a single-family house on a lot large enough that it can only be sited in the suburbs or exurbs. Then, the federal government subsidizes the product. It gives buyers a special government-backed loan to buy it and tax breaks for owning it, and then helps pay for the highway needed to reach it.
This system is a deliberate creation of the government, going back many decades. It is not a product simply of demand meeting supply at agreed-upon prices. Ostensibly, it is meant to promote homeownership. But in reality, it does not. Instead, it encourages mass financial speculation on housing, urban sprawl, and widespread resistance to new construction.
Location, Location, Location
Elizabeth James was just 22 when she was convinced to buy a house in Jacksonville, Florida.James, whose name has been changed to protect her privacy, had absorbed the message communicated by the federal government, and by a close friend who happened to be a mortgage broker, that homeownership is the way to build wealth.
Although she was not yet settled in her career, she took a major financial risk and took out a mortgage to buy a home in a neighborhood far from where she’d been renting. For her, it marked the first step toward prosperity and into adulthood.
Soon, though, James felt regret. She didn’t fit in with her neighbors and didn’t feel as safe as she did in her old neighborhood. In time, she realized that she was having to drive whenever she wanted to socialize with her friends or go to a bar — major downsides for a single person, as she was then.
She has since moved away and lived in several cities in the United States and in Europe, and has come to understand the importance of the real estate saying “location, location, location.”
Now, in her forties, she lives closer to the core of a big city and isn’t looking to buy if the conditions aren’t right — for instance, if she has to drive an hour outside the city to find a house she would qualify to buy. She wants to be around people who share her interests, and to be able to walk to a grocery store or a pharmacy.
“I think I’ve also realized that a home is not necessarily always an investment as well, and I think that I originally thought that was the case,” she said in a phone call. “I think it’s a place that you live.”
Home as a Wealth Machine
The idea that filtered down to young Elizabeth James — that homebuying is the path to wealth — did not spring up organically. It was promulgated by the federal government over the course of a century, starting with Herbert Hoover.Hoover, as commerce secretary under President Warren Harding, outlined his vision in a 1922 speech for a housing exhibition, titled “The Home as an Investment.” In pursuit of that scheme, Hoover sought uniform building codes and zoning rules across the country. In 1924, when relatively few localities had zoning, his agency published a model zoning law that, by 1930, thirty-five states had adopted.
What happened in those years was critical to defining the American system of housing. Advised by powerful private industry groups, such as the National Association of Real Estate Boards, the Hoover Commerce Department firmly rejected, as socialist, the model of building public housing that had gained steam in France and the United Kingdom. Instead, it backed a system in which housing was built by private interests — soon, with aid from the government.
At the same time, the agency promoted standardization to ease operations for large businesses. The idea that diverse local codes could allow for differing wall thicknesses or floor loads, for instance, presented an obstacle to construction firms working at a massive scale throughout the country.
In other words, the Hoover Commerce Department began the tradition of the federal government promoting a model in which housing was a standardized consumer and industrial product, one that could be manufactured at scale just as easily in the arid heat of Arizona as in the rolling Green Mountains of Vermont, and financed by an investor in New York City just as well as by a small local bank.
It is true that the United States had a pre-existing pro-suburbs movement in the 1800s, led by thinkers such as Catharine Beecher and Frederick Law Olmsted, that promoted an ideal of the detached home with a yard as combining the best of urban living and rural tranquility. What the Hoover Commerce Department launched, though, was instead a project to transform housing into an investment product that could be quantified, regularized, and generally made legible in a way conducive to the workings of big business, creating the conditions for the sprawl that would later take over America.
Presidents of recent decades would go further. Bill Clinton in 1995 laid out a National Homeownership Strategy, describing a house as an “asset that can grow in value and … generate financial security.” His Department of Housing and Urban Development backed the idea of homeownership as a “forced savings plan.” Both Clinton and George W. Bush, with his vision of the “ownership society,” would seek to boost homeownership rates by letting low-income families take on greater mortgage debt, to disastrous effect in the financial crisis of 2008.
In fairness to politicians, when they tout homeownership, they are simply recognizing the financial reality that homes account for more than a quarter of total household wealth. Two-thirds of U.S. families own their homes, with a median value of $323,000, according to Federal Reserve data. In comparison, the median value of total household assets is only slightly higher, $332,000.
And homeownership is thought to confer benefits not just for families but for their neighborhoods and the broader civil society. Homeowners are more likely to maintain gardens and to engage in church groups. They are also more likely to be engaged in local government.
To conservatives, the “ownership society” rhetoric is appealing because homeowners have more “skin in the game” with respect to taxation. To progressives, homeownership is a worthy goal because it shields lower-income families from inflation and gentrification.
But politicians of both parties have failed to understand the unintended consequences of policies meant to boost homeownership. Most consequentially, those policies do not in fact increase homeownership rates. Instead, they increase housing debt and housing size, thereby encouraging families to overinvest in housing. This is known thanks to a large and growing body of economic literature, and to comparisons with other countries that do not subsidize housing in the same way.
To understand why existing federal policies increase debt and home size — and thereby sprawl — it is best first to take stock of what the main policies are.
The Tax Breaks
One consideration that played an overriding role in Elizabeth James’s decision to buy the Jacksonville home was the fact that she could deduct interest payments on the mortgage from her taxes.Although the mortgage interest deduction is now fiercely defended by the housing industry, it did not begin as a pro-housing measure. The original Revenue Act of 1913 allowed for the deduction of all sorts of interest payments, effectively treating households like businesses, for whom interest payments are ordinary deductible business costs.
Ronald Reagan’s landmark 1986 tax reform did away with individuals’ ability to deduct other forms of interest paid, such as for credit cards. But it maintained the mortgage interest deduction. Reagan told the National Association of Realtors before the bill’s enactment that “we will preserve that part of the American dream which the home mortgage interest deduction symbolizes.”
The value of the deduction was temporarily limited by the 2017 tax overhaul, commonly known as the Trump tax cuts. In 2025, the deduction will account for almost $26 billion in forgone tax revenue, the Joint Committee on Taxation estimates. If the Trump tax cuts expire as scheduled at the end of this year, that amount would jump to $94 billion next year. As a point of reference, that is a tax expenditure — that is, essentially spending through the tax code — about ten times larger than the Environmental Protection Agency’s annual budget.
Yet the mortgage interest deduction is just one of several major federal tax breaks for housing. Homeowners can also deduct property taxes paid to state and local governments. As with the mortgage interest deduction, this tax break was effectively grandfathered into the code and reflects America’s unique federal–state system of governance. No other country has such a tax break.
In 2022, $107 billion was claimed in deductions for state and local property taxes paid, translating to a tax expenditure of somewhere in the ballpark of $7 billion. This expenditure too, though, will be far larger if the Trump overhaul expires, on the order of $50 billion.
The other major explicit tax break for housing is that homeowners who sell their house are not taxed on their gains, up to a limit of $500,000 for married couples. This measure, which will lose the federal government about $46 billion this year, was added to the tax code in the 1950s, a period of rapid industrialization, to make it easier for families to sell their homes and move if necessary for work.
There is one more housing-related tax break of significance, one that is a bit difficult for most Americans to wrap their heads around. It is that homeowners do not have to pay income tax on what is called “imputed rent.” To understand this tax break, consider two hypothetical people, Arnold and Bob, who each have $500,000 in cash. Arnold buys a house and rents it out to a tenant, who pays $3,000 a month. Arnold has to pay income taxes on that $3,000 in rental income. Bob, meanwhile, buys a house that is the same as Arnold’s for all possible uses, but he moves into it himself. Bob doesn’t have to pay any taxes on the $3,000 “rent” that he effectively pays to himself.
This is not merely a theoretical tax situation. In Switzerland, for example, homeowners must pay taxes on Eigenmietwert, or imputed rental income.
How Tax Breaks Raise Prices, Not Ownership
A year after Reagan’s tax overhaul, in 1987, the Danish government, as part of a raft of reforms meant to end years of inflation, enacted a tax overhaul that cut back significantly on interest deductions, including those for mortgages. The reform affected households differently based on their income, creating a sort of natural experiment.In 2017, a group of economists led by M.I.T.’s Jonathan Gruber concluded, using data based on a census of the Danish population, and looking at reactions to the reform by income, that the change did not affect homeownership at all. Instead, it led to smaller home sizes and lower prices.
Maxence Valentin, an economist at ETH Zurich, is the author of a recent survey of the econometric evidence regarding tax breaks for housing. “It’s still quite a big amount of money that is spent by the federal government that just keeps prices high,” he told me in a phone call.
Such results are not a surprise to economists. It is to be expected that tax advantages get capitalized into the price of a house. Consider a homebuyer with a housing budget of $3,000 a month. At today’s rates and with a 20-percent down payment, that would allow him to buy a house in the ballpark of $500,000. If he gets a tax break for mortgage interest payments, though, he could afford a house of perhaps $550,000 on that same budget. In a market where supply is constrained — which is most housing markets these days — prices just get bid up, and most of the extra $50,000 is pocketed by the person selling the home...
"The Purpose Of A System Is What It Does..."
From Forbes Magazine, September 13, 2021:
The Purpose Of A System Is What It Does, Not What It Claims To Do
Stafford Beer, British theorist, consultant, and professor at the Manchester Business School, coined and frequently used the phrase “The purpose of a system is what it does” (POSIWID) to explain that the observed purpose of a system is often at odds with the intentions of those who design, operate, and promote it. For example, applying POSIWID, one might ask if the purpose of an education system is to help children grow into well-rounded individuals, or is it to train them to pass tests? “There is after all,” Beer observed, “no point in claiming that the purpose of a system is to do what it constantly fails to do.”
POSIWID stands above judgement and partisan opinion when considering any system - all one has to do is take note of its actions and outputs. And when those actions and outputs don’t align with what the system claims as its purpose, it jeopardizes the trust, confidence, and loyalty of those who work inside the system and those whom the system purports to serve....
....MUCH MORE
Using this heuristic to look at systems like education or government helps focus on the fact that in a system, as opposed, possibly, to a one-off event, the result is the reality to focus upon.
Reality is not the intentions of the systems designers and the systems implementers and reality is surely not the protestations or explanations, excuses or justifications that surround most human endeavors.
The end result of a system, is what the system is meant to do. For the rest it is hard to put it better than:
et emploient les paroles que pour déguiser leurs pensées"
—François-Marie Arouet--'Voltaire', Dialogue xiv. Le Chapon et la Poularde (1766).
"Men use thought only to justify their wrong doings, and employ speech only to conceal their thoughts"
And on real estate in particular:
Haves and Have Nots: The Real Real Estate State and Artificial Scarcity, Technology and Planning
In September 2013's "Ben Franklin on Labor Economics (or how to create an underclass)" I intro'd with:In the United States The Land Ordinance of 1785 set the cost of land purchased from the government at $1.00 per acre in sections of 640 acres.
The easiest way to create a dependent class is to price them out of the real estate markets."In countries fully settled…those who cannot get land must labor for others that have it; when laborers are plenty, their wages will be low; by low wages a family is supported with difficulty; this difficulty deters many from marriage, who therefore long continue servants and single...."
This price was raised to $2.00/acre in 1800 but purchase was paid for in four equal annual payments.
In 1820 the price of Federal lands was reduced to $1.25 per acre with payment in cash.
An alternate conveyance in the 1862 Homestead Act maintained the $1.25 price.
Compare the wages various craftsmen could command:
In 1785 a journeyman carpenter in New York City was paid $1.12 ½ per day.
Here is the average hourly wage for various years, note the post Civil War inflation in the 1870 numbers and the decreases of the latter 1800's deflation:
Here is the average hourly wage for various years, note the post Civil
War inflation in the 1870 numbers and the decreases of the latter 1800's
deflation:
- Occupation 1860 1870 1880 1890
- blacksmith 0.178 0.304 0.259 0.271
- carpenter 0.182 0.410 0.276 0.322
- machinist 0.158 0.260 0.227 0.243
- laborers 0.098 0.156 0.135 0.151
- Occupation 1860, 1870, 1880, 1890
- blacksmith, 10.68, 18.24 15.54 16.26
- carpenter, 10.92 24.60 16.56 19.32
- machinist, 9.48 15.60 13.62 14.58
- laborers, 5.88, 9.36 8.10 9.06
The point of all this is that in relatively short order a working person could earn enough to purchase a smallholding, that 1785 carpenter is earning almost 1 acre per day.
Even if the cost of non-Federal land was 10x the above a working person could still actually contemplate becoming a land owner. No more.
It's probably worth repeating:
4. In Countries full settled, the Case must be nearly the same; all Lands being occupied and improved to the Heighth; those who cannot get Land, must Labour for others that have it; when Labourers are plenty, their Wages Will be low; by low Wages a Family is supported with Difficulty; this Difficulty deters many from Marriage, who therefore long continue Servants and single. Only as the Cities take Supplies of People from the Country, and thereby make a little more Room in the Country; Marriage is a little more incourag'd there, and the Births exceed the Deaths....-Benjamin Franklin, “ObservationsConcerning the Increase of Mankind, Peopling of Countries, etc.” (1751).
And the headline story, a repost from 2019:
Henry George had this stuff nailed.
From Real Life Magazine:
Built to Shill
The fiction of convenience makes cities less livable....
