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How We Subsidize Suburbia

What image springs to mind when you picture “federally subsidized housing”? Most people imagine a low-income public housing tower, a homeless shelter, or a shoddy apartment building.

Nope—suburban homeowners are the single biggest recipient of housing subsidies. As a result, suburbs dominate [1] housing in the United States. For decades, federal finance regulations incentivized single-family homes through three key mechanisms:

  1. Insurance
  2. National mortgage markets
  3. New standards for debt structuring

The housing market hides these details from the typical home buyer. As a result, most people are unaware of these subsidies. But their effects are striking—they determined the location and shape of development across America for generations.

A New Deal to Restore the Housing Industry

Debt has a negative connotation these days. Credit cards, student loans, and auto loans are the anchors that keep many Americans in debt for most of their lives. Meanwhile, we view mortgages very differently—they are seen as an investment, a symbol of adulthood, and a sign of financial stability.

This was not always the case. In the early 1900s, mortgages were just like any other kind of debt. Nowadays payments are spread out [2] over decades, but back then they came due all at once after a few years [3]. Most people didn’t have enough cash at the end of the term. It was standard to pay back some and negotiate a new loan for whatever they still owed.

This worked fine while the economy was booming, but investors refused to renew the loans after the 1929 stock market crash. Homeowners missed payments and foreclosure rates doubled [4]. The housing industry collapsed, taking the economy down with it.

New Deal policymakers realized that restoring the economy depended on restoring the housing sector. In 1934, they created the Federal Housing Administration (FHA) with two key mandates:

  1. Revive the housing market, and
  2. Make homeownership attainable for more Americans

In pursuing these goals, the FHA determined the design, structure, and location of new private development. In turn, it made suburbia the dominant form of housing in the United States.

“The most ambitious suburbanization plan in U.S. history”

By making an offer lenders couldn’t refuse, the FHA exercised tremendous power over residential design. Mortgages had to meet an opinionated set of criteria to qualify for the federal insurance. Lenders could invest in mortgages not covered by the program, but they had a strong preference for homes that conformed to the guidelines. Compliance was mandatory for the insurance, so they pressured developers to follow the rules. By 1959, 25 years after it was formed, the FHA had helped three out of every five American families purchase a home.

FHA rules had implicit and explicit hierarchies of what homeowners ought to want. They had two key purposes: to stimulate the economy, and to constrain the market to only good investments. These goals—plus the social assumptions of the time—were reflected in the FHA’s evaluation of a mortgage. The standards included:

The combined effect of these standards was the most ambitious suburbanization plan in United States history [8]. The FHA favored suburbia, so subdivisions became one of the most common neighborhood types within a few decades.

New Frontiers for Suburbia

New Deal programs enabled the expansion of suburbia into new regions, too. Prior to the Depression, mortgages were extremely local. Investors could not lend money from a distance, so capital accumulated in slow-growth areas and was scarce in fast-growing ones.

In commoditizing mortgages, New Deal programs made possible a national mortgage market for the first time. FHA guidelines standardized home loans, which allowed lenders across the country to treat loans of the same rating as fungible [9]. Since the quality of these homes was assured by FHA inspectors, “investors from all over the country would know exactly what a particular mortgage was worth.” [10] For the first time, capital-rich investors could lend money to developers expanding into the South and West.

The creation of the Federal National Mortgage Association [11] (FNMA, better known as Fannie Mae) in 1938 took this a step further. Fannie Mae created a secondary market by purchasing mortgages from lenders. It created liquidity for these originators, which in turn allowed them to underwrite more mortgages. The federal government created Freddie Mac (FHLMC) [12] in 1970 to serve a similar purpose. The combination of these secondary markets and the FHA guidelines was in effect a massive financing of suburban sprawl, all facilitated by the federal government.

The government also set a national limit on interest rates for mortgages. It created a standard rate for the country as a whole, where before there had been immense variation. Mortgages had been far more expensive in the West and South than in the capital-rich Northeast. The new standard rates made it artificially cheap to finance new development in the Southwest. This subsidized sparsely populated parts of the country, while disadvantaging older metropolitan areas. It also coincided with the creation of the interstate highway system, on which we’ll go into more detail in an upcoming post.

New Markets for Suburbia

While federal programs increased the geographic size of the market, they also increased the number of people who could afford a down payment. They did this by tweaking the structure of mortgage debt in two ways:

1. They decreased the size of monthly payments by spreading them over a longer period of time.

2. Federal programs slashed what was an acceptable down payment.

Harvard economist Edward Glaeser described [14] the impact of “the mortgage subsidies that were explicit in the tax code and implicit in Freddie Mac and Fannie Mae” in a Boston Globe op-ed:

These home-borrowing subsidies … pull people out of America’s urban centers. More than 85 percent of people in detached homes are owner-occupiers, in part because renting leads to home depreciation. More than 85 percent of people in larger buildings rent. Since ownership and structure type are closely connected, subsidizing homeownership encourages people to leave urban high-rises and move into suburban homes.

By making long-term, amortized loans with low down payments the norm, federal policies made it possible for millions of people to buy single-family homes. These homeowners enthusiastically moved into the new mass-produced subdivisions to the west.

Invisible Subsidies

On the surface, mortgages appear to be a mostly free-market enterprise. Buyers take out financing through a private broker; they find a home through a private real estate agent; and they purchase their home from a private developer. Some people take out FHA loans, and everyone has to deal with the pesky permitting process, but for the most part homeowners transact with private parties.

The system masks a huge amount of government intervention. It isn’t evident to the average person, because it works through obscure mechanisms like insurance and financing terms. These don’t look like conventional cash subsidies, but they distort incentives, supply, and demand in the same way. Though these mechanisms go mostly unnoticed, they have transformed residential finance in America.

The U.S. is the most suburban country in the world [15]. Most assume this is the organic result of individual preferences, because there’s little visibility into the ways that policy has shaped incentives. The reality is that the government played a huge role. Because these subsidies are complex and technical, it’s easy to forget their long history, but if we want to begin to understand the current state of the housing market, we have to first understand how we got here.

Devon Zuegel is a software engineer and urban planning enthusiast. This article originally appeared at Medium [16].

21 Comments (Open | Close)

21 Comments To "How We Subsidize Suburbia"

#1 Comment By Eileen Klees On October 20, 2017 @ 11:11 am

To anyone who has studied urban planning this essay covers familiar ground. These market distortions also played a huge role in redlining and the creation of ghettos, as well as effecting the brutal traffic jams omnipresent in most American cities, even with public transportation.

If the only role government played in the housing market was to enforce equal housing lending, that is no more mortgage interest deductions, no favorable ratings for specific types of housing, no land size requirements, etc., we would all see just how much it costs to keep up suburbia.

#2 Comment By PrairieDog On October 20, 2017 @ 12:55 pm

You make it sound as if no one would possibly want to live in the suburbs absent the subsidies you identify. You might consider that those ‘subsidies’ were created because there was a demand for them, not because there was some politically unwanted and unpopular government policy to trick people into moving to the ‘burbs.

#3 Comment By Tyro On October 20, 2017 @ 7:34 pm

You might consider that those ‘subsidies’ were created because there was a demand for them

Likewise, I would argue that there is existing demand for size M tshirts. However, I don’t see why we should give subsidies and special treatment to the purchase of size M white tshirts while restricting access to similar subsidies for size S and size L or XL shirts.

In my experience, these discussions inevitably have the defenders of the suburbs argue:

A) THEY like the design of modern exurbs
B) Their preference is superior to the alternatives
C) Public policy should reflect and subsidize their preferences because it rewards people with their preferences and choices, which they regard as socially superior to others and should be publicly acknowledged as such

#4 Comment By Greg Webb On October 20, 2017 @ 10:04 pm

With “public transit” I’d bet urban dwellers are still more subsidized. The subsidies probably just increase the price more than change consumer preference.

#5 Comment By Wilfred On October 20, 2017 @ 10:47 pm

Sharp rise in urban crime, beginning in the 1960’s, gave many folks a reason to prefer the suburbs.

#6 Comment By Stephen On October 21, 2017 @ 4:08 am

This article is misguided and even misleading. It claims that “[t]he U.S. is the most suburban country in the world.”

The problem is that the newgeography.com article that claim links to makes NO SUCH CLAIM. If anything it says that Canada, Australia, and the US show remarkably similar pattern of suburban sprawl. (“Even with the differing definitions, the data in Canada, Australia and the United States is remarkably similar.”)

But you won’t find any mention of that in this article. That’s because the author has an underlying thesis and he is attempting to massage the evidence to fit that thesis.

For example, he claims: “In the early 1900s, mortgages were just like any other kind of debt.” It just so happens that in the early 1900s there were few if any motor cars.

Why is that important? Read on!

The author makes it sound as if suburban sprawl only exists in the USA–and it only exists because of American federal housing subsidies. The reality, however, is that it exists in many other countries across the face of this Earth, whether they subside housing or not.

Or as the new geography.com article phrases it: “[S]uburbanization has occurred virtually wherever people can afford cars. This is even true in Europe, Japan and China.”

For what has made suburban sprawl possible is not government money, federal or otherwise (although you might conceivably argue that such subsiding was a contributing factor), but the motor car and everything that comes with it (like centralised shopping complexes and super highways).

In contrast, before most people had motor cars (i.e. back in the early 1900s) there was little suburban sprawl. That’s because most people had to walk or take public transport to get to where they had to go.

Furthermore, what has arguably encouraged the sprawl is low-density housing. If everyone lived in 50-storey apartment blocks there would be a lot less need for suburban sprawl. But most people–at least those with young families–don’t want to live in apartment towers. They want a backyard for the kids to play around in. They also want a place where they can park their cars off the street. (Most condominium apartments still only have one car space even though many families nowadays often have at least two cars: one for the husband and one for the wife. And as the kids grow up, the cars tend to proliferate further. If you still only have a single car space, those other cars have to go somewhere, which is generally out onto the street. Now imagine a street lined with 50-storey apartment towers, and thus c.200+ apartments apiece, with one car space per apartment…)

#7 Comment By Deenot Yeboem On October 21, 2017 @ 8:59 pm

Suburbia (subsidized is a nice way of saying not subjected to heavy taxation) was a phase in social devolution absolute necessary (along with the incessant wars) in taming the wild human beast into the urban farms of the future. In some places they started already to shred the suburbia and move everyone into urban apartments. The new apartment farms build south and north of the US Capitol in Washington DC gives the proper tone for the implementation of doctrine set by Agenda 21/35 and beyond. It is the transition avenue from the hard work in the family owned farm and the cow pie smell to the yoga sessions and smell of the artificial sanitizers. It represent the atomization of the society, from family unity under God’s new law, to personality deprived particles easily blown around by the breath of the beast. All what matters is who you’re going to meet at the end of the journey in this world.

#8 Comment By Steve On October 21, 2017 @ 10:08 pm

Riffing on Eileen:
From the FHA underwriting manual of 1938:
“980 (3).Recommended restrictions should include provision for the following:

g. Prohibition of the occupancy of properties except by the race for which they are intended”

#9 Comment By Sam Snider On October 22, 2017 @ 1:25 pm

@Prairiedog you make a good point and I think that you’re right that there was certainly a demand for more housing. It did not have to be suburban housing but that became the best option because of things like the FHA, interstate highway act, and so on.

White city folk were made an offer they couldnt (would be silly to) refuse. But that offer was coated with subsidies and still is to this day, and I think that’s primarily what this article is getting at. Just pointing out the subsidies and what literal effect they had on the housing markets.

#10 Comment By philadelphialawyer On October 22, 2017 @ 2:46 pm

All forms of living arrangements are “subsidized” to some extent. We live in an incredibly complex legal and social environment, and almost everyone, regardless of where or how they live, contribute a good portion of their income to “the government,” and receive a lot back from it too. Rural areas are hardly self sufficient, and have been “subsidized” in various ways since at least the passage of the Homestead Act. Cities and towns are “subsidized” by the mere fact that government services and administration are centralized in towns and cities. And cities and towns also receive the bulk of government spending for cultural amenities. It proves very little to point to one government program, and assert, even if accurately, that it favors the suburbs. To make the argument that the author is trying to make, one would have to show that, in toto, considering all governmental policies, at every level of government, relating to taxing and spending and regulating, there is a consistent bias toward favoring suburbs.

#11 Comment By Voltaire On October 22, 2017 @ 5:32 pm

PrairieDog, whether or not people want to live in the suburbs, their history is what it is. I live in the suburbs and my friends are in the suburbs. Some love and some hate it. The ones who hate it stay in it because, well, it is artificially inexpensive since it is more plentiful than other forms of development. Had federal policy encouraged more kinds of development then other urban and suburban models would be available. Some would want the current model because they like it and others would choose a different model.

In my own case, I have a variety of reasons why I stay where I am. I do not like the built environment of where I live, not remotely. However, there are factors beyond the suburban model that lead me stay where I am. If, on the other hand, I were able to buy a house on a gridded street where each house looked different and I could walk to a mixed use corner development, I would move in a heartbeat. That can also be a suburban model. In fact, at one time about a century ago it was a vibrant and common suburban model. If it were as plentiful and affordable today as the master planned committees with cookie cutter houses, squiggly streets, and homeowners associations to keep pesky property owners in line, I know a lot of people who would jump ship and make the change.

#12 Comment By Youknowho On October 23, 2017 @ 10:13 am


Ah, those homeowners’ associations…

People who defend local government at the expense of central government, the more local the better, as being more conductive to freedom NEVER had to deal with a homeowners’ association.

#13 Comment By Youknowho On October 23, 2017 @ 10:17 am

@philadelphia lawyer.

The point is not that suburbia is not the only subsidized, it is that it is a highly artificial living arrangement. No corner stores? Lawns that have to be mowed, instead of vegetable gardens? No setting up your own business? A tyrannical homeowners association telling you what color to paint your house?

No one else in human history lived in such conditions.

#14 Comment By wake On October 23, 2017 @ 11:33 am

Great article with lots of detail rather than opinion only

#15 Comment By philadelphialawyer On October 23, 2017 @ 2:08 pm


Actually, “the point” of the article IS the subsidy issue. As to your points, I would just refer you to PrarieDog…plenty of people like the suburbs.

#16 Comment By JonF On October 23, 2017 @ 6:55 pm

RE: The point is not that suburbia is not the only subsidized, it is that it is a highly artificial living arrangement. No corner stores? Lawns that have to be mowed, instead of vegetable gardens? No setting up your own business? A tyrannical homeowners association telling you what color to paint your house?

Much of that is of very recent provenance. The post WWII suburbs did not have HOAs, often had stores and other amenities close enough to walk to, and many people did garden (of course a lot of people still do).

#17 Comment By Lorin On October 24, 2017 @ 1:31 pm

Providing structures to allow people to build equity over time seems like a good thing to me, but the urban design elements are definitely problematic, not to mention the classic American Dream.

#18 Comment By Tyro On October 24, 2017 @ 11:20 pm

Actually, “the point” of the article IS the subsidy issue.

It subsidized and thus artificially created alien living arrangements that would not have existed otherwise.

But, as I said, many of their advocates seem to view these policies as a form of using the government to publicly reward people who have those preferences, above others.

#19 Comment By Kevin Killion On October 25, 2017 @ 9:17 am

Also: vast sums are spent on expressways and subsidized commuter rail systems that effectively subsidize and encourage workers to live far outside the cities where they work.

#20 Comment By Sally Stewart On November 3, 2017 @ 12:51 pm

Fact: Not for African Americans–why wasn’t there any mention of this in the article?

#21 Comment By Sally Stewart On November 3, 2017 @ 12:53 pm

Fact: African Americans were not welcomed & I didn’t see this in the article when talking about FHA’s strict guidelines.