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Homeownership Does Not Guarantee Middle-Class Prosperity

Real estate speculation doesn't create wealth, it sets up a game of musical chairs--and we now know what happens when the music stops.

Something has gone wrong with homeownership in America. Once the ladder to wealth, economic divides in real estate have increasingly become a driver of inequality, further entrenching political and economic privilege. Not only does this trend have knock on effects for the younger generation, but it’s not unique to the United States. The United Kingdom, Canada and possibly other countries are also feeling the shock of changing real estate markets.

On the surface, at least viewed from prosperous places, things look pretty good. According to Bloomberg, homeowners in some of America’s major coastal cities gain as much as $100 in wealth through equity each hour of the working day. Collectively, reports CNBC, U.S. homeowners are sitting on $5.4 trillion in property equity, the most ever reported.

And yet these gains are not realized equally across the country. For every suburb where 1950s starter homes once sold for less than $10,000 are now worth around $700,000, there are places like Baltimore, Detroit, Buffalo, or Rochester, where many homes are basically worthless. In many areas, no matter how much money people invest in their homes, they are not sitting on hundreds of thousands of dollars in equity. In fact, since the Recession, the primary assets of millions of ordinary Americans have most likely lost value.

But what should be even more alarming than these troubling disparities is the underlying fragility of real-estate markets, and the increasing folly of government policies that promote suburban property development. Today’s trends are merely a symptom of a larger delusion—homeownership as the path to middle-class wealth and status—and have exposed it as the lie it always was.

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Since World War II, the United States has suffered from a divergence in home values—but it is only recently that this reality began to affect the white middle class. The roots of the present crisis go back to the 1930s.

During the Great Depression, President Franklin D. Roosevelt wanted at least one New Deal program that would work with private enterprise rather than against it, according to Kenneth T. Jackson in Crabgrass Frontier. The result was the Federal Housing Administration (later expanded by the GI Bill), which used the full faith and credit of the United States government to affect a revolution in banking and housebuilding. The effort not only standardized appraising across the country, it more or less invented the 30-year mortgage, imposed construction quality standards, and took much of the risk out of homebuilding and lending by guaranteeing mortgages and construction loans.

Unfortunately, Roosevelt’s program also helped segregate parts of the country not previously segregated—and strengthened such discrimination so that it persists in some cities well into this century. This shocking history is documented at length by Richard Rothstein in The Color of Law. Basically, the FHA decided that they weren’t going to guarantee (or only partially guarantee) loans in places that didn’t meet their racial and aesthetic standards: Neighborhoods and suburbs that were both all white and “well-planned,” meaning that residences were all single-family homes, with commercial and industrial uses kept separate or out of the area altogether, had the easiest time getting loans. In fact, according to Rothstein, the FHA made developers like the Levitt brothers in New York—famous for the middle-class Levittowns that became the image of affordable postwar suburbia—put deed restrictions in their homes prohibiting their resale to a non-white person.

The result of these two policies together—government-subsidized risk and economic and racial segregation—was unsurprising.

Coupled with massive highway building, the suburbs mushroomed around cities and tens of thousands of white Americans bought new homes at prices that were cheaper than renting. City neighborhoods depopulated and the prewar building stock—with fewer renters and almost no possibility of loans—declined drastically in value and deteriorated in quality. Urban blight and the ghettoization of racial minorities in cities and away from opportunity was the direct result of federal policy, reinforced by zoning and a neighborhood’s own poverty. The people who owned those homes never saw their equity grow through the years. Even in cities that are experiencing growth in property values, Black neighborhoods rarely see any benefits. In Chicago, the city’s segregation is starkly shown on Google Maps: the North Side looks like Brooklyn, while the South Side looks like Detroit.

Washington has encouraged homeownership for decades. The result has been windfall profits for the few and an albatross of mortgage debt for the many. According to Matthew Desmond, author of Evicted, in 2015 the federal government subsidized homeownership to the tune of $134 billion, $71 billion of which was through the Mortgage Interest Deduction. According to Jackson, these policies, which largely promote suburban development, are rooted in 19th-century views of cities as unhealthy and immoral.

Such policymaking was also driven by a belief that newer homes would foster better character: The trouble with slums and slum-dwellers wasn’t that they were desperately poor in an era of massive industrial upheaval, but that they lived in slum buildings. (According William Tucker in The Excluded Americans, so-called reformers like Jacob Riis were often motivated as much by a desire to prevent Jews and Catholics from immigrating to America compassion for the urban poor.) By the 1920s the justification for single-family homes had evolved from crude ethnic and religious stereotyping into a more recognizable narrative: One’s home still formed one’s character, only now homeownership would incubate the virtues of hard work, thrift, and industriousness instead of moralizing Protestantism.

A similar evolution took place in the United Kingdom, where in 1923 the Conservative MP Noel Skelton wrote a series on housing policy in The Spectator, later published under the title Constructive Conservatism. Skelton coined the phrase “property-owning democracy” and argued that homeownership would encourage people to be better citizens, who in addition to the economic justifications, would become invested in their community and country. Skelton’s ideal was made policy by Conservative governments throughout the 20th century, reaching its apogee during the premiership of Margaret Thatcher, who popularized the idea of the property-owning democracy and introduced a right-to-buy policy where residents of council flats (apartments built under Labour governments and owned and maintained by local governments) could purchase them.

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The century-long burst in homeownership on both sides of the Atlantic has had dire consequences. As John Myers, a co-founder of the pro-development group London YIMBY, put it, “Encouraging homeownership also makes it more difficult to get political support for more housebuilding.”

The people who own homes in this current boom cycle believe that allowing more homes to be built in their communities, especially apartments, could lower their property values and hence their net worth. As a result, San Francisco now has serious discussions about whether a coffee shop facade that’s just four years old qualifies for historic preservation, while affordable senior apartments get torpedoed by wealthy homeowners. The results do not sound like a recipe for good citizenship: Young people are prevented from forming families, small businesses are forced to relocate, and the working classes are condemned to either unthinkably long commutes or overcrowding. Or, in the parts of the country not enjoying a housing boom, small cities and towns face continuing deterioration and decline.

The irony is that homeownership isn’t even an unqualified good for the homeowner. Their property wealth is completely illiquid. They could be sitting on a million dollars worth of house, but not have the cash to pay the property tax. In the end, real estate speculation does not create wealth; it sets up a game of musical chairs—and we now know what happens when the music stops. Countries, communities, and cities are much healthier economically when their financial security doesn’t depend on the performance of one type asset—especially when the better the asset does, the worse off the larger society becomes.

Skelton, far more than the progressive reformers in the United States or his successors in Britain’s Conservative Party, saw this. His property-owning democracy wasn’t simply a nation of homeowners, but involved factory workers that became co-owners or profit-sharers in their factories, along with smallholdings and cooperatives for farmers. When he spoke of “property,” Skelton meant “capital.” This philosophy is thus much more similar to the distributism of Hilaire Belloc and GK Chesterton than the tracts of ticky-tacky stretching away forever.

I doubt we will ever get the wealth we foolishly ploughed into postwar suburbs back. But we can at least pivot toward a recovery by changing laws to encourage people to save to build wealth, rather than rely on speculative equity in real estate.

Matthew M. Robare is a freelance journalist based in Boston.



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