The politics of sky-high house prices: how government jacks up the price of owning your home.

• Author: Miller, Joel
• Position: Cover story

LANCE UYEDA bought his first home in the San Francisco Bay Area almost 30 years ago. Today his oldest son rents an apartment and works in retail sales. But because the market is tougher now than when his father bought, he probably will need more than a good performance review and a raise to buy four walls and a set of shingles. Unless he "wins the lottery," says Dad, "he's not going to have a home to call his own."

The reason is that housing prices in the Bay Area and Silicon Valley have shot up faster and higher than almost anywhere else in the country. In 1985, according to the National Association of Realtors, the median price for a home in the San Francisco Bay Area was about $258,000 in inflation-adjusted dollars; today, it's over $720,000.

These rapidly escalating costs are sparking an exodus. Fully 40 percent of respondents in a 2006 survey by the Bay Area Council said they'd considered leaving the region; more than two-thirds of that number flagged high-priced homes as a major reason. Similarly, a 2004 survey by the Public Policy institute of California found that more than 30 percent of people between the ages of 18 and 31 were considering new digs beyond the Bay.

Not everyone is sympathetic to the predicament of such people. Janet Yellen, president of the Federal Reserve Bank's San Francisco branch, argues that "high housing costs are a symptom of the Bay Area's success." Prices have shot into the stratosphere, she says, because the region "is such a magnet for certain kinds of high-skilled, high-tech companies."

She's correct, to a point. The booming tech industry in the Bay Area and Silicon Valley has created high demand for real estate in those regions, which has not just driven up prices but created a solid constituency for the huge price tags: people who bought low and are now millionaires because their humble stick-and-stuccos morphed into miniature mansions. But what about everyone else?

The Debtor's Prison

In their book The Two-Income Trap, Elizabeth Warren and Amelia Warren Tyagi use the term "house poor" to describe middle-class homeowners who stretch themselves too thin financially to buy the roof over their heads. They often become slaves to their mortgages because they over-borrow; worse, they're prone to default because they don't have enough savings to cushion the impact of a divorce or job loss--two fairly common occurrences.

Warren and Tyagi blame zero-down and subprime loans, the fruit of interest rate deregulation. But zero-down and sub-prime lending simply creates financing options for people who otherwise would be unable to borrow. And who can blame banks and mortgage companies for catering to a strong and otherwise unmet demand?

Not that there aren't problems here, principally in what many observers call the "housing bubble." In the words of former U.S. Labor Secretary Robert Reich, "Bubbles form when it's easy to get capital to invest in something, and when investors assume that somebody else will come along after them and pay even more for it." But Reich warns that when mortgage rates rise when the easy money dries up--"buyers can no longer assume that future buyers will pay more, because some future buyers won't be able to." That's when the bubble bursts and people are stuck with more house than they can afford and no way of offloading it.

But cheap money and investor enthusiasm don't fully explain the problem. In many areas, housing prices were rising before the bubble began to bulge.

There is another side of the housing cost swell that Warren and Tyagi overlook. It is rooted not in deregulation but in limited supply and inelastic costs--the reasons people have to overextend themselves to purchase a home. These factors will remain even if the bubble pops, which means high-priced homes will...