The Mortgaged Generation:
Why The Young Can't Afford A House

Phillip Longman

[Reprinted from The Washington Monthly -- April 1986]

At age 30, Henry George ; considered himself a defeated man. With only a grade school education, he had bounced across California from one odd job to another before coming at last to New York, where he soon enough failed as a telegraph news reporter.

The year was 1864, and as George wandered the streets of that rich city, he was struck by what seemed to him a great paradox of modern political economy: that alongside the fabulous mansions and other manifestations of vast new wealth, there could exist unemployed masses whose poverty seemed to exceed that of the most wretched peasants of the Old World. In an instant. George would later write, there came to him "a burning thought, a call, a vision. Every nerve quivered."

The result, 15 years later, was George's worldwide bestseller and enduring classic, Progress and Poverty. The book's central thesis was that in any region where the population and the economy are growing, the price of land will inflate even faster. Yet, as George wrote, an "increase in land values does not represent an increase in the common wealth, for what land owners gain by higher prices, the tenants or purchaser who must pay them lose." As George might put it today, land speculation is a zero-sum game. To manufacture any product, or even to provide any service, requires land, labor, and capital in some combination. As more resources are committed to cover the inflating price of land, there are commensurately fewer dollars available to reward workers and those who invest in productive enterprise. To remedy this, George proposed a simple solution: a 100 percent tax on all price appreciation in land, combined with elimination of all taxes on labor and capital.

George stopped short of applying the same logic to man-made forms of real estate. In his view, a house and the lot on which it stands are of an entirely different metaphysical order, since the one is the product of labor and the other a "gift of nature." Yet had he witnessed the super-inflation of home prices during the past 30 years, George may well have found this a distinction without much difference. In 1955 the median price paid for a new home was $13,400; by 1985 that price had risen to $88,900 - a real increase of more than 60 percent. This price increase was only negligibly the result of anyone's honest labor. Indeed, had a sufficient number of workers been building houses during those decades, supply would have met demand, and prices would have' remained stable. Moreover, for at least the past 20 years, the ever-increasing amounts of capital used to finance the sale and resale of existing houses at ever-higher prices has come at the direct expense of investments needed to maintain America's industries, infrastructure, and general standard of living. As a result, not only are today's younger Americans paying unprecedented prices for housing but they are earning less real wages than they would have otherwise. In 1973, the average 30-year-old male needed to pay only 21 percent of his income for the mortgage on a medium-priced house. By 1984, that had jumped to 44 percent. To understand how this has happened, one must look at the government's well-intentioned housing policies of the past 50 years. With the possible exception of agriculture, there is no sector of the economy in which government is more directly involved in manipulating prices than in real estate. For nearly 30 years, the results were all to the good. From the Depression on, the federal government has provided mortgage credit and tax benefits aimed at making houses affordable for as many Americans as possible. At the local level, towns have regulated land use to ensure that neighborhoods remain pleasant enough for homebuyers to want to move in. These efforts have, in many ways, tangibly improved the quality of American lives. In 1940, only 44 percent of all families in America were homeowners; today, that figure has risen to 64 percent. Meanwhile, though detractors like Lewis Mumford have made it intellectually fashionable to denounce the sprawl of suburbia, its shaded sidewalks and detached single-family homes are just what the majority of Americans still, and probably always will, desire.

But over time the actions of government have come to serve more those who already own homes than those who would like to buy one. More and more dollars have been diverted from building new houses toward raising the prices of old ones. As a result, in recent years a young family seeking to buy a house has been increasingly likely to find that they can't afford one. At the same time, as more of the national wealth has been allocated to the housing market, investment in our industrial base has eroded. The consequences have been decaying bridges, abandoned factories, and, ultimately, declining real wages for the average worker - especially the young worker just starting to raise a family and hoping to buy a house.

Brother, can you spare a mortgage

Mortgages are largely an invention of the twentieth century. Before World War I, they carried a stigma; the best families were expected to buy their houses outright. During the twenties, however, mortgages became widespread enough to finance a housing boom. The terms of these mortgages seem quaint by .today's standards. Even savings and loans, which had been formed specifically to hold the savings of working people and to provide them with home mortgages, would not lend money longer than three to five years, after which time the loan would be refinanced. Bankers refused to write longer-term mortgages because they had to provide their depositors with ready access to their savings. As the cardinal rule of banking puts it, "If you borrow short you cannot afford to lend long."

With the onset of the Depression, wages and prices declined, making it more difficult for people who owed money on their houses to keep up with their monthly payments. In 1926, roughly 68,000 homes were foreclosed; by 1932, the number was up to 250,000. Foreclosures accelerated a decline in housing prices at the same time that savings banks were beset by lines of depositors demanding their money back. The result: hundreds of savings and loans failed, threatening the entire U.S. banking system with collapse. In July 1932, President Herbert Hoover responded by creating the Federal Home Loan Bank Board. Initially funded with a $125 million line of credit with the Treasury, the board was empowered to lend funds to the savings banks, using their mortgages as security. The idea was that the agency would then turn around and sell bonds, backed by these mortgages, in order to raise more capital to lend to the savings banks. This would enable the savings banks to write still more mortgages, and on better terms, while also maintaining enough cash on hand to satisfy their depositors.

The bank board set an important precedent: for the first time, the federal government was using its powers to divert more credit to potential home buyers as a way of protecting both the banks and homeowners from the consequences of falling real estate prices. But the experiment proved a failure. No one would buy the bonds, which were not federally guaranteed.

Within a year, the Roosevelt administration raised the stakes enormously with the creation of the Home Owner's Loan Corporation, empowered to sell up to $2 billion in bonds backed by the full faith and credit of the United States. The HOLC made it possible for the first time for at least some lucky homeowners to take out mortgages running as long as 15 years, rather than the usual two or three years.

\ Yet this infusion of new and cheaper credit into the real estate markets still was not enough to keep home prices from falling. Between 1929 and 1934, according to the Census Bureau, the average price of owner-occupied houses slipped by more than 20 percent. Nor was this infusion of credit enough to end the massive unemployment in the construction trades. In 1934, Congress passed the centerpiece of Roosevelt's housing legislation, the National Housing Act, which established the Federal Housing Administration. Lewis H. Brown, a prominent housing expert who helped the administration craft the legislation, enthusiastically described its purpose in an article for The New York Times.

"Everybody who has studied real estate and building knows," Lewis asserted, "that the short-term mortgage, that on which the lender may demand his money at the end of three or four years, was the panic element in the collapse of real estate values." The solution, Lewis concluded, was obvious: entice lenders into offering longer-term mortgage money, with monthly payments going not only to pay interest but also to retire the principal. "Under this bill," Lewis explained, "real estate mortgages will not only be insured by government but the lending bank.. .will be getting its money back each month. There will be no better security in the world than these amortized real estate mortgages."

With the passage of the National Housing Act, the government committed itself to insuring mortgages running for as long as 20 years, at 6 percent interest, and with as little as 20 percent down. The program, administered by the FHA, did not catch on immediately. Some bankers doubted that Congress could insure anything beyond its own term. Others resented all the paperwork, insurance fees, and appraisals the FHA required. As late as 1939, FHA-insured mortgages were only 10 percent of the total.

But gradually, loan officers overcame their habitual prudence. Before insuring a mortgage, the FHA investigated the property and approved the neighborhood. This extra measure of security made FHA mortgages easily tradable. Banks found they could sell FHA mortgages even to investors in distant parts of the country who knew nothing about the property on which the notes were written. If for any reason a homeowner fell behind on a mortgage guaranteed by the FHA, the agency would take over the debt, thereby insulating the mortgage holder from almost all risk. In effect, the government had made it much safer for an investor to put his money into FHA mortgages written by any small, local bank or savings and loan than to own stock in even the largest, most secure corporations.

Quonset huts to Levittown

With the end of World War II, veterans returned home to face an acute housing shortage. Through the Depression and the war, residential construction had been minimal; the yearly average of new homes built had been fewer than 100,000. Now demand for houses surged. Newspaper feature stories vividly illustrated the result. In Omaha, a newspaper advertisement read: "Big Ice Box, 7 x 17 feet, could be fixed up to live in"; in New York, two newlyweds became squatters in a department store window. As late as 1947, six million families were sharing quarters with friends or relatives, while half a million were living in temporary structures such as quonset huts. But the housing shortage had a built-in solution. Since consumers had found so few items to buy during the war, banks were overflowing with savings. These savings allowed the federal government to provide, through the FHA and a new Veterans Administration loan guarantee program, the opportunity to purchase a first home with little or no money down and at interest rates below 4 percent. The result was an unprecedented boom in homebuilding. The number of houses built rose from 114,000 in 1944 to 937,000 in 1946 and a peak of 1,692,000 in 1950. Overall, a yearly average of 1.4 million houses were built between 1945 and 1965. These new homes were, by the standards of the past, both relatively easy to afford and generally of high quality.

Probably the best-known of these houses were those built in Island Trees, Long Island, subsequently renamed Levittown. In his new book, Crabgrass Frontier, Kenneth Jackson describes how William J. Levitt's ingenious mass production technique put up houses quickly and efficiently:

After bulldozing the land and removing the trees, trucks carefully dropped off building materials at precise 60-foot intervals. Each house was built on a concrete slab (no cellar); the floors were of asphalt and the walls of composition rock-board .... Freight cars loaded with lumber went directly into a cutting yard where one man cut parts for ten houses in one day. The construction process itself was divided into 27 distinct steps - beginning with laying the foundation and ending with .a clean sweep of the new home. Crews were trained to do one job - one day the white-paint men, then the red-paint men, then the tile layers. Every possible part, especially the most difficult ones, were preassembled in central shops....

Between 1945 and 1965 mortgage debt for houses increased from $18.6 billion to $212.9 billion. As a percentage of the nation's gross national product, this was an increase from 9 to more than 30 percent. But this investment bought something real and sorely needed: new houses. And since supply rose to meet demand, these new houses were provided at affordable prices. Through the 1950s and early 1960s, home prices increased by an average of only 5 percent a year. Even this statistic exaggerates the true rate of inflation- because the median-priced house was meanwhile increasing in size and luxury. In 1969, the President's Committee on Urban Housing found (hat most of the rise in home prices between 1953 and 1965 was the result of a 40 percent increase in the floor space of new, median-priced houses, combined with the introduction of "air conditioning, better thermal and sound insulation, more and better appliances, more tasteful design and landscaping, and many other features"

Walling the suburbs

But if federal housing policy proved a success during the two decades after World War II, after 1965 it began to falter. The volume of mortgage debt continued to climb; between 1965 and 1984 it increased from $213 billion to more than $l.3 trillion. But a smaller proportion of this money was spent on creating new houses, which were sorely needed as the postwar baby-boom generation came of age. Instead, the money tended to be spent on the buying and selling of existing houses.

In absolute terms, the number of new houses built remained more or less constant; during the past two decades, it has hovered around one million a year. But this construction has not kept up with rising mortgage debt. During the 1950s, the amount of mortgage money lent each year averaged about one-third less than the total value of new houses built. But in the years to come, with each new dollar of credit committed to mortgages, a declining share went toward buying new homes and a rising share toward the resale of existing homes at ever-higher prices. During the 1960s, the amount of mortgage lending rose to within 10 percent of the value of all new construction. During the first half of the 1970s, mortgage lending for the first time surpassed the value of all new construction. Between 1975 and 1978, the amount of residential mortgage lending rose to nearly half again as much as the value of all new homes built. While lower down-payment requirements for new homes accounted for part of this increase, most of it was the result of an increase in the resale and refinancing of existing houses.

Meanwhile, homebuyers found themselves paying higher prices without buying a commensurate increase in luxury. During the 1970s, for example, the median floor space of new houses increased by only 15 percent while the median price more than tripled. Between 1980 and 1983, the median floor space of new houses actually declined slightly, and a declining percentage of new homes contained such amenities as basements and garages; still, the median price of new homes rose 16 percent.

I It might at first seem that the problem of rising prices is solved by the easy credit that inflated prices to begin with. But it doesn't work that way.' For example, mortgage interest rates in the Washington area have lately been falling rapidly. But on Capitol Hill, where I live, several sellers whose homes have been on the market for months are already raising their asking prices by several thousand dollars in response to the declining cost of credit. If potential buyers will be paying a lower interest rate, the sellers figure, they can afford to pay a higher price. This means that buyers will have to borrow more than they otherwise would to buy the same house This, in turn, will price the minimum down payment required for a mortgage out of reach for many. Since Capitol Hill is a gentrifying area with strict limits on new construction, the end result will be an upward price spiral that will increasingly make houses there affordable only to the affluent.

Why did government policies aimed at providing affordable housing instead bid up the price of existing houses? Part of the answer involves the simple fact that by the mid-1960s, there was less and less land available for development that was still within commuting distance of any place you might find a job. To recreate the 1950s boom in affordable suburban housing, we would need to invent a new system of transportation, which, like the combination of the 8-cyIinder automobile and the limited access highway, would rapidly expand the supply of land that is economically feasible to develop. Today, despite the trend of business moving to the suburbs, inadequate investment in new highways and mass transit and deferred maintenance of existing highways and bridges is actually lengthening commuting times and in effect shrinking the supply of land.

But another, purely political factor contributing to today's high housing prices lies in the ever-more restrictive zoning ordinances, elaborate and time-consuming building permit processes, land use restrictions, and other measures that limited growth during the late sixties and seventies.

Building codes and zoning restrictions are valuable means by which local government can prevent growth from destroying a community. At the most practical level, they ensure that new houses will be built safely; to a certain degree, they are also helpful in maintaining the character of a neighborhood or town. Historical preservation, for example, can be a laudable means of preventing the casual destruction of buildings that pass on from one generation to the next a sense of our cultural heritage. On a less exalted level, prohibitions that proliferated early in this century against building outhouses clearly improved sanitation in towns across America.

But when towns require, as many now do, that all new homes contain more floor space than those built in the 1940s and 1950s, that they have copper rather than plastic pipes, and that they be placed far back on minimum half-acre lots with paved driveways and four-foot sidewalks, it shouldn't surprise us that prices become prohibitive. In preserving rigorous standards for development, communities find themselves also, often quite deliberately, protecting their investment at the expense of newcomers.

By the late 1960s, more than 78 percent of cities with populations greater than 10,000 had some form of land-use regulation. More than half had zoning ordinances, and nearly 45 percent had enacted subdivision regulation. Roughly a quarter of the towns in America required new homes to be built on lots of at least half an acre. Two blue-ribbon panels of the time reported that such regulations were frequently being used to limit residential development to large, expensive single-family homes and that the effect of this was to restrict the supply and inflate the cost of all housing. Most young people no longer had the option of buying a new, no-frills, unfinished "starter house" of the size and kind that Levitt made famous, for in most towns across America such houses had already been declared illegal to build.

Yet, in the years to come, the web of local regulation would become much more complex. In 1982, President Reagan's Commission on Housing found that "unnecessary regulation of land use and buildings has increased so much over the past two decades that Americans have begun to feel the undesirable consequences: fewer housing choices, limited production, high costs and lower productivity in residential construction." The commission concluded that such regulations had pushed up costs of houses in some communities by as much as 25 percent of , the final sales price.

: Consider local building codes, which often go far beyond what is required to ensure public safety. Modern, labor-saving techniques such as pre-assembled roof trusses and- pre-wired panel boards are often forbidden. These restrictions in part reflect the political power of construction unions, whose members fear that such modern, labor-saving techniques as prefabrication will cost them their jobs. But they also derive from pressures wielded by homeowners intent on enhancing the "quality" of the neighborhood and, by extension, their property values. Another method, commonly used to raise property values is to limit the supply of land. As with building regulations, land-use restrictions can protect legitimate public interests or be abused for the purpose of inflating property values. Admittedly, the line can be hard to draw. If, for example, some farmers on the fringes of a city are suffering financially, should they be permitted to subdivide their land for development, thereby destroying the rural character of the neighborhood and perhaps even raising property taxes for those farmers who remain?

A less ambiguous case is that of the California suburbs of Rolling Hills, Indian Wells, Bradbury, and Hidden Hills. These are literally walled cities, with entrance permitted only after one has passed uniformed guards and closed-circuit TV monitors, displayed an automobile sticker, or shown an identification card.

Another means by which homeowners restrict growth and raise property values is by requiring newcomers to assume the full cost of new schools, roads, utilities and other infrastructure that might be made necessary by an increase in local population. During the 1950s, such expenditures were traditionally borne by the community as a whole. . Developers often took advantage of this arrangement by putting up unrestricted numbers of houses and then announcing to a local government that it would have to hook up sewers, build roads, and so forth. Naturally this created a movement to make the developers assume some of these costs. Unfortunately, many communities went beyond having developers pick up some costs and instead had them pick up all costs. Developers, in turn, passed them on to new homeowners, often on a one-to-one basis.

In Dade County, Florida, one developer building a housing project discovered to his chagrin that the asphalt used to pave the main streets of his subdivision would have to be three inches thick - the same thickness standard for interstate highways. This baffled him, since one inch was the standard requirement for streets of the sort he was building. After making some inquiries, he found out that the public works department, which would be responsible for repaying the streets in the years to come, had been suffering a budget squeeze. One way to save money was to make road-building specifications so stringent that anticipated repair could be pushed back as far as 20 years. So the department had quietly been raising the asphalt thickness requirement by half an inch each year. In effect, the city was forcing the developer to pick up the cost not only of building the road but of repairing it over the next two decades. He, in turn, passed this entire cost onto the families that bought his houses.

Sometimes such restrictions can prevent a development from being built in the first place. In San Diego, for example, the city council approved a prize-winning development in the north end of the city only after the developers agreed to build all public facilities - schools, water plants, sewage plants, police stations, firehouses, libraries, and parks - with their own (that is, the new residents') money. Even so, then-Mayor Pete Wilson opposed the plan, claiming that the new residents would still need other city services costing two and a half million dollars a year.

Overall, it's difficult to measure how much land-use restrictions have raised the cost of housing, but it's not surprising to find that during the 1970s, when such restrictions were gathering steam, the price of land for new homes rose faster than the price of labor, material, or any other cost component except financing. By 1980, nearly a quarter of the cost of the average new home would go just for the cost of the lot. Henry George, where are you when we need you?

Debt and taxes

Local barriers to new construction weren't the only reason why rising national investment in houses failed to keep prices down after 1965. Also important were three additional factors acting in combination: the creation of new government agencies that pumped mortgage money into the housing market faster than new houses were actually being built, tax subsidies that failed to discriminate in favor of new home construction, and inflation. In 1968, the Council of Economic Advisors, in its annual report to the president, predicted that 20 million new housing units would be required during the 1970s "to meet the needs of the postwar baby boom." Yet the housing industry was building only about 1.5 million houses per year. A logical response might have been for the federal government to take measures to coax more capital specifically into new home construction. Instead, it directed dollars into new and existing homes alike.

The Federal National Mortgage Association (Fannie Mae) started life as a minor New Deal program. In 1968, however, it was given greater power as a congressionally chartered, privately held company dedicated to attracting capital into mortgage lending. Fannie Mae's mission is to purchase mortgages. To raise the necessary capital, Fannie Mae sells to private investors bonds and special securities backed by pools of mortgages. With a call on the Treasury to buy $2.25 billion in offerings should the credit market dry up, Fannie Mae has little trouble luring capital. Today, its portfolio is worth more than a hundred billion dollars. Investors assume that the government would never allow Fannie Mae to collapse.

The same housing act that expanded Fannie Mae's power also gave it a little sister, the Government National Mortgage Association (Ginnie Mae). Shortly afterward, they were joined by a little brother, the Federal Home Loan Mortgage Corporation (Freddie Mac). Ginnie Mae works much the same way Fannie Mae does, but its issues are formally guaranteed by the full faith and credit of the US. Treasury. Freddie Mac was designed to purchase mortgages from savings and loan institutions. (Fannie Mae and Ginnie Mae buy their mortgages from a variety of institutions, including commercial banks and mortgage companies.) Between 1968 and 1980, these three agencies, along with other agencies that provide low cost mortgages to farmers, sold S361 billion in bonds and pumped it into home finance.

At the same time, the tax advantages of owning a house were growing more compelling. Ever since Woodrow Wilson had signed the income tax into law in 1913, "interest on indebtedness" had been exempt. When tax rates rose during the 1940s, the mortgage-interest deduction became a significant factor in spurring people to buy houses. Similarly, as the inflation of the 1970s automatically pushed Americans into higher tax brackets, more and more Americans sought to shelter their earnings in real estate. Between 1965 and 1980, "bracket creep" increased the marginal tax rate for a family earning the median income from 14 to 24 percent. By the late 1970s the only shelter many of these Americans were seeking was shelter from high taxes. Young families in need of a home found themselves bidding against' an ever greater number of speculators and other buyers seeking tax advantages.

At the same time, many people who ordinarily would not have wanted to live in houses decided that it was financially prudent. Senior citizens, for example, have often found it more convenient to move to an apartment after their children leave than to try and keep up a large, empty house. Many upper- and middle-class urban families prefer apartment Jiving lo the hassles of home ownership. Single people generally have little need of a house. But during the 1970s, the only alternative lo owning a home was to pay rent and try saving your money, while inflation and rising taxes ate you alive. And because the government saw to it that the supply of cheap mortgages continued to expand, homeowners found that there was virtually no limit to what they could get for their property.

Largely as a result of government-sponsored real estate speculation, by the end of the 1970s, the thrift ethos in this country was nearly extinct. The American middle class took its counsel from best-selling authors, popular lecturers, and other savants who had discovered how to get rich quick in real estate. Even those homeowners who were too afraid to leverage or pyramid their inflating home equity into untold fortune still looked more and more to their "investment" in real estate as a substitute for savings. And who could blame them? Their rising property values did reduce their need to save. Moreover, so long as federal banking regulations forced banks and thrift institutions to hold down interest rates on savings accounts well below the general rate of inflation, only a fool would expect to retire comfortably on a passbook account.

Empty skyscrapers

But the great real estate bubble of the 1970s could not expand indefinitely. One reason was that by the end of the decade, the savings and loan industry was nearly insolvent. With assets largely tied up in long-term, low-yielding mortgages, and depositors increasingly scarce, most S&L's were losing big money, and many were going bust. Home buyers, especially in states that imposed usury ceilings on loans, found it increasingly difficult to secure mortgages. There were loo many borrowers and too few savers.

Two key pieces of legislation sought to repair the crisis. The first came in March 1979, when banking regulators for the first time since the Great Depression permitted all of the nation's thrift institutions to write variable rate mortgages. This meant that thrift institutions would no longer be forced to assume all the risk of future inflation or high interest rates, shifting most of that burden to the mortgage borrower.

The next major reform came in March 1980, when Congress passed the Depository Institution Deregulation and Monetary Control Act. With this measure, the government launched a full-scale assault on banking regulations that for the course of two generations had kept interest rates artificially low. The act called for the elimination of interest-rate ceilings on savings accounts by 1986 and struck down regulations that, for more than 60 years, had forced thrift institutions to invest their deposits primarily in real estate lending. The result ought to have been fewer mortgages taken out for the purpose of investment or speculation and more taken out for the purpose of buying a home that a family wanted to live in. This, in turn, would have made houses more affordable. An ancillary benefit should have been more investment diverted from real estate into productive, wealth-creating enterprise.

But that didn't happen. Instead, most thrifts continued to invest in real estate. This time, however, the emphasis shifted to commercial real estate. Between 1979 and 1983, the share of all S&L lending flowing to non-residential real estate such as office buildings, hotels, and shopping malls, increased from 3.6 percent to 12.9 percent. By the.mid-1980s, most major cities across the country faced a severe glut of new office space, while continuing to endure acute housing shortages.

This time the problem had largely to do with ix policy. In 1981, Congress radically reduced the mount of time it took to write off a new investment. Previously the period of depreciation for business property had been 25 to 30 years. Now, under the new Accelerated Cost Recovery System, that was reduced to 15 years. Since, as Henry George observed, land values are one of the few things in life that are virtually guaranteed to appreciate over time, and considering that few buildings crumble after 15 (or even 30) years, granting generous tax depreciations on commercial real estate proved to be one of the least sensible tax cuts of the Reagan era. Combined with an investment tax credit of up to 10 percent, which applied to such things as hotel furniture and assorted other tax breaks, ACRS raised the value of tax writeoffs so high that in some cases they exceeded the cost of the building itself. Although the tax bill currently before the Senate would bring real estate depreciation back up at least 30 years and eliminate the investment tax credit, for the moment the speculation commercial real estate continues.

Houselessness

Today, a rising number of young Americans remain priced out of the real estate market. Between 1977 and 1983, the home ownership rate for families headed by a person under 35 declined from 41 to 34 percent. As we've seen, much of the problem can be blamed on the way government, directly and indirectly, has inflated the price of houses. But there's another side to the government's role in the mortgaging of America: the problem of where the money hasn't been spent. Between 1965 arid 1981, while the value the country's stock of residential real estate was increasing by an annual, inflation-adjust average of 6.7 percent, the value of corporate bonds and equities increased by less than 1 percent. As two noted critics of government subsidies to homeowners observed in 1981, "One the visions that haunts efforts at projecting housing realities into the future is one of a splendid tract development surrounding an abandon factory. "

It isn't quite fair to say that America has built too much housing in recent decades; indeed, most people would find it obvious that we haven't built enough to shelter the baby boomers and their children in the style of the previous generation. But it is clear that as a nation we have been diverting far too much financial capital to bidding the price of existing homes, and not enough capital into maintaining our roads and bridges and other infrastructure, or to improving the competitiveness of our manufacturing base a labor force. Each year since the late 1960s, for example, America's rate of productivity growth has fallen farther and farther behind that of major trading partners. If today's young people are to have affordable housing, we must redirect some investment from real estate not only into the machines but also into the education and job-training they need in order to compete in today's world economy. It's worth noting that the typical family in Japan, where land is very scarce, spends only 5 percent of its disposable income on housing, compared to the typical American family, which spends 15 percent.

How are we to reconcile our still-pressing need to invest in new housing while at the same forming the capital needed to put our industries back on their feet? The best solution would be for Americans to save more; the larger the pool of savings, the less harsh the trade-off between investment in housing and investment in factories and education.

Meanwhile, whatever we invest as a nation in real estate ought to go disproportionately for new construction, rather than for underwriting existing housing. Any tax credit or credit subsidy that does not, for whatever reason, lead to the creation of new homes does nothing to make housing more affordable. Instead, such subsidies serve to drive up the price of existing homes, by raising demand without increasing supply. Moreover, because such subsidies cost the government foregone revenue - the mortgage interest deduction alone costs the Treasury about $35 billion a year - they aggravate the budget deficits and cost all Americans more money in the long run.

Federally sponsored credit agencies like Fannie Mae and Ginnie Mae should be directed to place more, and perhaps all of their investment portfolios into new, rather than existing residential units. Similarly, voters should demand that local governments prohibit the most blatantly exclusionary zoning laws and building regulations. Tax subsidies such as the mortgage interest-rate deduction serve simply to enrich present homeowners at the expense of all who follow unless they are targeted to encourage new construction.

Life often presents us with opportunities to enrich ourselves at the expense of latecomers. Often the transaction is inadvertent, as, for example, when generations of Ethiopians over grazed their land through ignorance of ecology, gaining more food for themselves but leaving their children and grandchildren to starve. America's current housing policies will certainly not cost future Americans their food and succor. But, unless reformed, they will cost us the wealth that we need to buy houses to live in.