The tragedy of the American Dream is that it made the most sense when it was least understood. In the decades following World War II, the United States experienced a housing boom with few parallels in history. The homeownership rate increased from 43.6% in 1940 to 61.9% in 1960—only about 3% below where it sat in 2020.
Most of the growth happened on the crabgrass frontier, as the share of the housing stock located in suburbs soared from 19% in 1940 to 44% by 1990. In the course of the suburban boom, homeownership became a part of the political religion of the United States and the undisputed setting of the American Dream. Owning a home with a garage on a leafy street, the Dream plan said, taught self-reliance, created happy families, and bred responsible citizens with a stake in their communities.
The dream came with more than the usual allotment of illusions. Without massive public subsidies for the automotive infrastructure, combined with active sabotage of public transportation, the suburbs would have remained prohibitively remote. Without racially motivated “white flight” from urban centers, those distant cow fields would have remained populated only with cows, and without racist policies they would not have remained white. The most intractable of the illusions had to do with the aura of self-reliance. The housing boom of the postwar period always pretended to be an expression of the pioneering spirit of hardworking individualists. Yet, it was principally the consequence of the most significant welfare program in American history, one that was targeted with unerring precision at the hearts and wallets of the white middle class.
In the postwar Dream period, federally funded financial and tax incentives (including changes in mortgage regulation, G.I. Bill provisions, allowances for the deduction of mortgage interest and property taxes, and omission of imputed rents) accounted for 40% to 45% of the increase in the homeownership rate. That comes before considering the contribution of the highway expansion program, in which the federal government covered 90% of the cost of making it possible for white people to live with other white people in otherwise remote locations.
As the economy boomed and other people’s incomes rose, moreover, home prices naturally increased. For the freshly recruited legions of the middle class, the housing boom was an equalizing, share-the-wealth program that converted economic growth into welfare payments for homeowners. It reinforced the growing equality in incomes, the growing empowerment of workers in the workplace through unions, and the growing access to quality education. In its highly racialized, morally compromised, and deeply self-deluded way, the American real estate game played a central role in the creation of a (mostly white) middle class whose power and breadth had few parallels in history.
Beginning around 1980, however, the great real estate welfare program shifted down and then quietly, without really drawing much attention to the fact, slipped into reverse gear. In its present form, the real estate system in America today transfers wealth from poor to rich, from young to old, from Black to white, and from the future to the past.
The timeline of inequality in housing prices falls into the same U-shape that characterizes graphs of income and wealth concentration trends over the past century. As a consequence of this change, the crypto-socialist-homeowner-cash-machine of the middle-class welfare state morphed into a laundry machine that began to funnel money and resources away from the middle and toward the top—or more exactly, the 9.9%.
If one mentions the words “government” and “housing” in polite conversation today (generally not a good idea), the words “taxes” and “poor people” are likely to make an appearance in short order. Yes, we want to help, the response will come, but aren’t we doing enough already? The funny thing is that government works much harder to help rich people make money off their homes than to help poor people find shelter.
According to the Center on Budget and Policy Priorities, the federal government spent $190 billion per year on housing assistance of various sorts, as of 2015. But 60% of this corresponds to the mortgage interest deduction, which benefits only the 7 million or so households with more than $100,000 in income. The bigger the house, the more they get. A further $32 billion per year goes to covering the exclusion of capital gains taxes on inherited homes. An uncounted additional amount pays for the capital gains exclusion on home sales. All but a few rounding errors land in the pockets of the 9.9%—every year.
The chump change left over for affordable housing, sadly, does remarkably little to ameliorate the housing crisis. One piece of it goes into subsidizing the construction of quality apartments in low-income neighborhoods. The organizing idea is that the purpose of housing is to supply low-income families with refuge from the weather and good kitchen appliances. This idea is bonkers. In fact, the point of housing today is to provide opportunity. As studies make abundantly clear, opportunity comes with a new or better neighborhood, not a new refrigerator.
Another piece of the affordable housing budget goes into housing vouchers. But these vouchers are often all but impossible to redeem outside the same, underserved neighborhoods where recipients already live, and so they, too, have the effect of concentrating disadvantage.
Homeownership, it has long been said, has the marvelous effect of making people put down roots in their communities. The evidence shows that homeowners’ first priority, as they joyfully plant themselves at the center of a community of fully realized fellow citizens, is to pour as much concrete as possible over those roots. The way to keep values up is to prevent other people from moving in.
The charms of the not-in-my-backyard movement, or NIMBYism, are sometimes thought to be universal to the human condition. In fact, they grow in power and impact with rising inequality. They grow with inequality both because there is more money at stake and, more importantly, because local power is a function of local money. According to Brookings, the deployment of zoning and land-use regulations to curb growth has risen in tandem with inequality. In a study of 95 metropolitan areas, researchers found that areas with high concentrations of wealth have more restrictive land-use regulations.
Why exactly does the sun appear to shine brighter in some neighborhoods than others? For starters, they’re usually located near a giant cash machine: the local tech monopoly or financial oligopoly. More optimistically, we could say that in the modern economy, high economic productivity happens in clusters where a certain density of know-how, networks, and human interaction yields high levels of economic activity and innovation. Thus, the wealthy neighborhoods tend to fall on transportation corridors or in easy reach of the leading urban centers.
Then they work to keep density low and squeeze every undesirable person out to some other location. That’s why the not-so-good-neighborhoods, almost by definition, are the ones that force their residents into long commutes, which are associated with increased stress levels, health problems, and likelihood of divorce. According to Harvard economist Nathaniel Hendren, commuting time is a better predictor of social mobility than education quality, family structure, and local crime rates.
The other big thing that the good neighborhoods have going for them is their schools. The dismantling and reprivatization of America’s system of public education has been happening one privileged neighborhood at a time. Ten of the top thirteen ranked public elementary schools in California on niche.com are located in the Palo Alto Unified School District, as are two of the top four public high schools in the state. They are free and open to the public. All the public has to do is buy a home in a neighborhood where the median home value was $2.8 million in 2020.
The effects of living in underserved areas are so well known, and so dismal, that they hardly need to be stated. Research consistently shows that bad neighborhoods really are bad for children, above all. In one particularly telling study, children from a randomly selected group of families who moved to wealthier neighborhoods were more likely to go to college, get married, have higher incomes, and live in higher-income neighborhoods themselves than the peers they left behind.
The geographical concentration of wealth brings many additional advantages for the lucky few beyond better schools and commutes. It supplies residents with social capital, in the form of networks that can help deliver valuable internships for the kids and open up business opportunities with prospective clients and employers. It delivers better security, nicer parks, and other public amenities.
The outcome of the process is visible in skylines and landscapes across the country. In leading urban centers like Manhattan, luxury apartments up in the stratosphere sit empty even as the population migrates away in search of more affordable housing. Ryan Avent, a columnist for The Economist, aptly describes the process as a “flight to stagnation.”
As economist Enrico Moretti and others have pointed out, this is bad news for the economy. Workers are fleeing the areas where they can be most productive and moving into the land of permanently lowered wages, all because the rent is too damn high. In the land of the 9.9%, we like to pretend that every neighborhood has a chance to become a good neighborhood. The reality is that our neighborhoods are so good precisely because the other neighborhoods are not.
Excerpt from The 9.9 Percent by Matthew Stewart. Copyright © 2021 by Matthew Stewart. Reprinted by permission of Simon & Schuster, Inc, NY.