Time to Dismantle the American Dream?


For some time, theorists have been suggesting that it is time to redefine the American Dream of home ownership. Households, we are told, should live in smaller houses, in more crowded neighborhoods and more should rent. This thinking has been heightened by the mortgage crisis in some parts of the country, particularly in areas where prices rose most extravagantly in the past decade. And to be sure, many of the irrational attempts – many of them government sponsored – to expand ownership to those not financially prepared to bear the costs need to curbed.

But now the anti-homeowner interests have expanded beyond reigning in dodgy practices and expanded into an argument essentially against the very idea of widespread dispersion of property ownership. Social theorist Richard Florida recently took on this argument, in a Wall Street Journal article entitled "Home Ownership is Overvalued."

In particular, he notes that:

The cities and regions with the lowest levels of homeownership—in the range of 55% to 60% like L.A., N.Y., San Francisco and Boulder—had healthier economies and higher incomes. They also had more highly skilled and professional work forces, more high-tech industry, and according to Gallup surveys, higher levels of happiness and well-being. (Note)

Florida expresses concern that today's economy requires a more mobile work force and is worried that people may be unable to sell their houses to move to where jobs can be found. Those who would reduce home ownership to ensure mobility need lose little sleep.

The Relationship Between Household Incomes and House Prices

It is true, as Florida indicates, that house prices are generally higher where household incomes are higher. But, all things being equal, there are limits to that relationship, as a comparison of median house prices to median house prices (the Median Multiple) indicates. From 1950 to 1970 the Median Multiple averaged three times median household incomes in the nation's largest metropolitan areas. In the 1950, 1960 and 1970 censuses, the most unaffordable major metropolitan areas reached no higher than a multiple of 3.6 (Figure).

This changed, however, in some areas after 1970, spurred by higher Median Multiples occuring in California.

William Fischel of Dartmouth has shown how the implementation of land use controls in California metropolitan areas coincided with the rise of house prices beyond historic national levels. The more restrictive land use regulations rationed land for development, placed substantial fees on new housing, lengthened the time required for project approval and made the approval process more expensive. At the same time, smaller developers and house builders were forced out of the market. All of these factors (generally associated with "smart growth") propelled housing costs higher in California and in the areas that subsequently adopted more restrictive regulations (see summary of economic research).

During the bubble years, house prices rose far more strongly in the more highly regulated metropolitan areas than in those with more traditional land use regulation. Ironically many of the more regulated regions experienced both slower job and income growth compared to more liberally regulated areas, notably in the Midwest, the southeast, and Texas.

Home Ownership and Metropolitan Economies

The major metropolitan areas Florida uses to demonstrate a relationship between higher house prices and "healthier economies" are, in fact, reflective of the opposite. Between August 2001 and August 2008 (chosen as the last month before 911 and the last month before the Lehman Brothers collapse), Bureau of Labor Statistics data indicates that in the New York and Los Angeles metropolitan areas, the net job creation rate trailed the national average by one percent. The San Francisco area did even worse, trailing the national net job creation rate by 6 percent, and losing jobs faster than Rust Belt Pittsburgh, St. Louis, and Milwaukee.

Further, pre-housing bubble Bureau of Economic Analysis data from the 1990s suggests little or no relationship between stronger economies and housing affordability as measured by net job creation. The bottom 10 out of the 50 largest metropolitan areas had slightly less than average home ownership (this bottom 10 included "healthy" New York and Los Angeles). The highest growth 10 had slightly above average home ownership (measured by net job creation). Incidentally, "healthy" San Francisco also experienced below average net job creation, ranking in the fourth 10.

Moreover, housing affordability varied little across the categories of economic growth (Table).

Net Job Creation, Housing Affordability & Home Ownership
Pre-Housing Bubble Decade: Top 50 Metropolitan Areas (2000)
Net Job Creation: 1990-2000 Housing Affordability: Median Multiple (2000) Home Ownership: Rate 2000
Lowest Growth 10  7.4%                                2.8 62%
Lower Growth 10 14.9%                                3.1 63%
Middle 10 22.8%                                3.2 64%
Higher Growth 10 30.9%                                2.6 61%
Highest Growth 10 46.9%                                2.9 63%
Average 24.7%                                2.9 62%
Calculated from Bureau of the Census, Bureau of Economic Analysis and Harvard Joint Housing Center data.
Metropolitan areas as defined in 2003
Home ownership from urbanized areas within the metropolitan areas.

Home Ownership and Happiness

If Gallup Polls on happiness were reliable, it would be expected that the metropolitan areas with happier people would be attracting people from elsewhere. In fact, people are fleeing with a vengeance. During this decade alone, approximately one in every 10 residents have left for other areas.

  • The New York metropolitan area lost nearly 2,000,000 domestic migrants (people who moved out of the metropolitan area to other parts of the nation). This is nearly as many people as live in the city of Paris.
  • The Los Angeles metropolitan area has lost a net 1.35 million domestic migrants. This is more people than live in the city of Dallas.
  • The San Francisco metropolitan area lost 350,000 domestic migrants. Overall, the Bay Area (including San Jose) lost 650,000, more people than live in the cities of Portland or Seattle.

Why have all of these happy people left these "healthy economies?" One reason may be that so many middle income people find home ownership unattainable is due to the house prices that rose so much during the bubble and still remain well above the historic Median Multiple. People have been moving away from the more costly metropolitan areas. Between 2000 and 2007:

  • 2.6 million net domestic migrants left the major metropolitan areas (over 1,000,000 population) with higher housing costs (Median Multiple over 4.0).
  • 1.1 net domestic migrants moved to the major metropolitan areas with lower house prices (Median Multiple of 4.0 or below).
  • 1.6 million domestic migrants moved to small metropolitan areas and non-metropolitan areas (where house prices are generally lower).

An Immobile Society?

Florida's perceived immobility of metropolitan residents is curious. Home ownership was not a material barrier to moving when tens of millions of households moved from the Frost Belt to the Sun Belt in the last half of the 20th century. During the 2000s, as shown above, millions of people moved to more affordable areas, at least in part to afford their own homes.

Under normal circumstances (which will return), virtually any well-kept house can be sold in a reasonable period of time. More than 750,000 realtors stand ready to assist in that regard.

Of course, one of the enduring legacies of the bubble is that many households owe more on their houses than they are worth ("under water"). This situation, fully the result of "drunken sailor" lending policies, is most severe in the overly regulated housing markets in which prices were driven up the most. Federal Reserve Bank of New York research indicates that the extent of home owners "under water" is far greater in the metropolitan markets that are more highly restricted (such as San Diego and Miami) and is generally modest where there is more traditional regulation, such as Charlotte and Dallas (the exception is Detroit, caught up in a virtual local recession, and where housing prices never rose above historic norms, even in the height of the housing bubble). Doubtless many of these home owners will find it difficult to move to other areas and buy homes, especially where excessive land use regulations drove prices to astronomical levels.

Restoring the Dream

There is no need to convince people that they should settle for less in the future, or that the American Dream should be redefined downward. Housing affordability has remained generally within historic norms in places that still welcome growth and foster aspiration, like Atlanta, Dallas-Fort Worth, Houston, Indianapolis, Kansas City, Columbus and elsewhere for the last 60 years, including every year of the housing bubble. Rather than taking away the dream, it would be more appropriate to roll back the regulations that are diluting the purchasing power and which promise a less livable and less affluent future for altogether too many households.


Note. Among these examples, New York is the largest metropolitan area in the nation. Los Angeles ranks number 2 and San Francisco ranks number 13. The inclusion of Boulder, ranked 151st in 2009 seems a bit curious, not only because of its small size, but also because its advantage of being home to the main campus of the University of Colorado. Smaller metropolitan areas that host their principal state university campuses (such as Boulder, Eugene, Madison or Champaign-Urbana) will generally do well economically.

Photograph: New house currently priced at $138,990 in suburban Indianapolis (4 bedroom, 2,760 square feet). From http://www.newhomesource.com/homedetail/market-112/planid-823343

Wendell Cox is a Visiting Professor, Conservatoire National des Arts et Metiers, Paris. He was born in Los Angeles and was appointed to three terms on the Los Angeles County Transportation Commission by Mayor Tom Bradley. He is the author of "War on the Dream: How Anti-Sprawl Policy Threatens the Quality of Life.

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Happy in SF

Early 30s, debt free, moved here in 2005 and watched the obvious bubble inflate and pop, renting happily all the while. I have stable employment and my household income is over 200k (I certainly could buy a house in SF or the surrounding suburbs). Why should I rent money (e.g. a mortgage) when I can rent a beautiful house for half what the mortgage would cost me, enjoy rent protection, and put my savings in a profitable investment. I love living in SF and very much value the regulations which have kept this place beautiful; at this point I don't have any plans to buy a house here, maybe I will pay cash for property down the road when rates rise and prices tank. Debt = slavery, wake up America.

Housing affordability and healthy economies

Perhaps the disconnect between "healthy economies" and "housing affordability" can also be explained by the value of the dollar? If it takes more dollars to buy the same house obviously the price goes up. It may be that the value of the dollar varies by SMSA not just nationally?

models too simplistic -- reality is more complicated

My problem with these discussions of housing markets is that the models are too simplistic when applied to specific cities.

"People are fleeing!" -- which people? what are the demographics of inflow population vs outflow? A lot of cities have a pattern of younger people moving in & older people moving out. Doesn't mean those cities are in failure mode.

"ABC city is losing jobs!" -- what kind of jobs? what are the parameters of the jobs being lost vs jobs being created? If a factory with 100 modest wage jobs relocates out of a city while 50 higher-paid professional jobs are created -- at the local level, is that a good or bad thing, & from whose perspective?

"happy people" vs "unhappy people" -- again, what demographics are we talking about? high income, low income, job type, life phase etc?

"excessive land use regulations" -- excessive to whom? to developers & new buyers who are desperate to have more homes built? or to existing residents trying to preserve what they see as quality of life & their existing financial investment in their homes? For every example of a city that's got ridiculous overkill in building regulations (San Francisco, New York)-- there's another city that's experienced major long-term damage to its quality-of-live (& property values) due to unrestricted building codes (Las Vegas, Houston).

Every geography has its pros & cons. Whether it's a good fit depends on the individual's priorities & life parameters: their career goals, desired lifestyle, stage of life (young/old, single/married, kids/no kids etc).

As a *country* -- we absolutely need to be concerned about where our population will live -- there need to be places where everybody/all citizens can find jobs & have the financial means to live a decent quality of life (whether as homeowners or renters).

But it's not going to be a single city or geography that necessarily provides all of that, for everybody across every single demographic. Cities & neighborhoods that have a lot of high-paying jobs (& resulting higher prices) are often not going to be happy places for lower-income people to live. And there are great places to live but that have no high-paying jobs & thus won't be viable places for higher-income people (except as retirement & 2nd home locations...which causes its own local problems, when big $$$ comes in from outside the area).

I don't have any easy answer, but I do know it's more complicated that quoting simple metrics about "X city lost/gained # jobs" or "# people moved out of/into Y city last year".

hibachi, The kinds of people

The kinds of people fleeing cities like SF, NYC, and Boston are in fact younger professionals- the very demographic who tends to help build the future economies of such places. As I mentioned in my response there is definitely a generational gap between those who "got there first" and those of us who've come later after home prices escalated to levels we can't afford even with higher salaries. This to me is a major problem. You can't expect a large city to retain its competitive edge if it loses a large segment of its younger population.

To be sure, yes- a lot of these major cities tend to attract younger people. But the trend seems to be that as soon as those young people want to start having a family, a house and so on they leave.

Count me and my wife as one

Count me and my wife as one of those couples leaving San Fran. The idea that people are happy to rent in places like SF and NYC is hogwash. The idea of owning a home here in the Bay Area is like a religion. People seem to go to extreme lengths to get into a house even if it means taking a risk by moving to a less than safe outer fringes neighborhood with the "hope" of it gentrifying someday. It seems almost laughably obvious that the primary reason more people rent in the Bay Area is because the cost of homes are too high for them to afford one. I'd also say that as far as 'happiness', I've never lived anywhere that had so many UN-happy people. Talk to anyone here long enough and the conversation is eventually going to turn to the subject of the cost of living. My parents came and visited me from NC a year ago. They got on the train from the airport and a young woman sitting next to them asked where they were from ( due to their accents) and the conversation immediately turned into one about how she would like to buy a house but couldn't and couldn't believe how cheap things were in NC, and so on. I myself have been very unhappy living here. It makes no sense that even though we make a very good income the cost of a starter home is still such an insane financial proposition. Perhaps because it seems counter-intuitive.

What's even more ridiculous is that its not just the middle class that can't afford a home here. Its the upper middle class as well. We make well over 6 figures and have for the past 5-6 years. We live frugal, fiscally responsible lives. Yet when you look at what a house realistically costs around here its still going to set you back around $500,000. I say "realistically" because even though there might be homes for $250,000-$400,000 in the Bay Area, these tend to be in far outlying exurbs or in bad neighborhoods.

Even if we were to say- plunk down a $100,000 down payment on a $500,000 the mortgage would still be $ 2,334.29 not including taxes, repairs, or utilities. Yes- we could feasibly afford to buy such a house but if either one of us lost a job this would put us in a financially risky situation. Even so, a LOT of other people don't put that into consideration and bury themselves up to the hilt in mortgage debt.

What's aggravating is that if you look around your typical Bay Area neighborhood, the average homeowner is in their late 60's and 70's. Not a lot of younger people. There's definitely a realization that a lot of residents here "got in" before things went crazy. These people are all too aware of this fact and are constantly opposing anything new that comes along. Recently a new bus stop was proposed in the town I live in. It was shot down immediately. Basically these residents have created paradise for themselves and they'll be damned if any young whipper-snappers will have any part of it- that is unless they want to shell out some serious money and buy their houses.

Yesterday a new report came out showing home prices have shot up 20% in the Bay Area so far this year. Amazing. The bubble has seemingly began its steady rise once more. Thus this signals to me that the Bay Area is a lost cause. We're going to be getting out of here soon and with it goes one more young professional family. Good riddance.

Good Article, but What's Up with The Data Used in WSJ Story?

"They also had more highly skilled and professional work forces, more high-tech industry"

In the Los Angeles CMSA, just 26% of adults have at least a Bachelor's. Metro Atlanta, where housing is almost West Virginia cheap, 34% have a bachelor's. In Dallas/Fort Worth, also one of the cheapest for housing, 31% have a Bachelor's. You mentioned Indy and KC, 35% and 32% respectively. Cleveland, where a house "costs as much as a VCR" according to the Hastily Made Cleveland Tourism Video on YouTube, also 26% - same as LA.

Moreover, other than having jobs that last 5 months, since when is having a "high-tech" industry equated with some great quality of life? Nursing and social work are two of the fastest growing professions in this country right now, but I think they're too boring for a lot of urban pundits to talk about.