The mortgaged generation: why the young can't afford a house.

• Author: Longman, Phillip

THE MORTGAGED GENERATION:

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 world-wide 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 superinflation 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 investment 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...