The Housing Bubble and the Boomer Generation

Much of the commentary on the current economic crisis has focused on symptoms. Sub-prime mortgages, credit default swaps and the loosening of financial regulations are not the root cause of the financial crisis. They are symptoms of what has recently become a surprisingly widespread belief that individuals, families and even entire nations could live indefinitely beyond their means.

The crisis has reminded everyone that, in the end, market fundamentals like supply and demand still matter and that ignoring traditional virtues like thrift and long-term planning can lead to grief. But what does this have to do with boomers?

Ultimately, this economic crisis shines some light on some of the most important yet unresolved and paradoxical aspects of American culture as it developed in the wake of the economic, social and political upheavals of the late 1960s and early 1970s.

Children coming of age in the 1950s and 1960s were born into families that, on average, enjoyed the greatest material prosperity and the best housing the world had ever known. The security offered by an enormously expanded and comfortable middle class allowed these children to crusade on behalf of various causes. Those who called themselves “progressive” pushed to expand individual civil rights, sometimes at the expense of what others perceived as community rights or duties, but at the same time they were often deeply suspicious of capitalism and markets and for this reason pushed to restrict the rights of private property owners in order to expand on their own notions of community rights.

The result was, on the one hand, a massive effort to empower racial and ethnic minorities, women, gay people and many others. This aspect of the revolutions of the 1960s era has always been highly controversial, with conservatives fighting the “reforms” every step of the way. On the other hand, starting about 1970, there was an explosion in regulations on the use of land including tighter zoning and building codes, regulations governing environmental matters, historic preservation and land conservation, growth and building caps and growth management schemes. It became harder to build at the urban edge because of the environmental rules and efforts to limit “sprawl.” It also became harder to build at the center because of substantial down-zoning and other regulations to “preserve neighborhood character,” particularly in affluent neighborhoods. This aspect of the 1960s progressive agenda has led to grumbling about NIMBYism but has otherwise generated surprisingly little negative commentary.

Nevertheless, this movement has created one of the most paradoxical legacies of the 1960s as programs justified in the language and logic of “rights,” have turned into bulwarks for the status quo and a mechanism to transfer wealth from younger families of modest income to more affluent older families.

In the 1950s and 1960s developers in America built a huge amount of housing, primarily on cheap land at the suburban edge of almost every city in the country. This housing was remarkably inexpensive and, together with liberal financing terms, allowed millions of Americans to enter into the ranks of home ownership and the middle class. It provided the underpinnings for the enormous wealth of the boomer generation.

Starting in the 1970s, though, particularly in some of the most desirable markets in the country, the same people who most benefited from the developments of the early postwar years turned against those development practices. They advocated regulations for many things that most people, then as now, would agree were desirable – conserving scenic areas and wetlands, protecting coastlines and animal habitats and preserving open space, historic buildings and neighborhood character.

Yet the net effect of all of these regulations was to limit severely the supply of land for urban uses. Even more important, existing homeowners, what I have elsewhere called the “Incumbents’ Club,” created a political system that allowed them to dictate how much growth and what kind of growth would be permitted in their cities.

This shift of decision-making about development from private developers and individual property owners to public planning bodies, almost always controlled by homeowners, was hailed by many observers as a triumph of democratic process. The community rather than the developers, so this line of thinking went, would henceforth dictate the growth of the community. The problem with this equation was that it failed to consider who was speaking for the community and whose voices were not heard or to calculate the costs and benefits of these policies.

For existing homeowners in affluent communities like Boulder Colorado, or Nantucket Island or San Francisco, this regulatory rush turned existing land ownership into pure gold. By limiting the supply of land for development and driving up the costs of development where the land was available, it pushed up the perceived value of all houses, including their own.

Take the case of the Bay Area, where land prices were on par with urban areas elsewhere in the country up until 1970. Then, as the area pioneered in land use regulations of every kind, house prices started a steep climb. Where the rule of thumb had long been that the average American family in any given urban market would expect to pay about three times its annual salary for an average house, by the early years of the 21st century it had reached the point where that average house in the Bay Area would be the equivalent of ten, eleven or even twelve years of the average family’s income. At the same time, however, in lightly regulated urban areas, even extremely dynamic ones like those of Atlanta, Houston or Phoenix, house prices registered no comparable rise against incomes.

Nor was this all. There was at the same time an increasing movement around the country to push the cost of what had been considered public goods, like new roads, street lights, sidewalks and sewers, even parks and schools, onto the developers who then passed these costs on to the eventual buyers. As a result, existing owners who enjoyed infrastructure paid for by previous generations no longer had to pay for the infrastructure of their children’s and grandchildren’s generation.

Finally, this elaborate edifice of protection of the interests of existing landowners was capped by a series of tax revolts starting in the 1970s, particularly Proposition 13 in California. This made it possible for members of the incumbent’s club to enjoy the benefits of rapidly escalating house prices without paying a corresponding share of the property taxes that financed most municipal services.

These land use regulations and real estate tax policies have made possible, at least in certain highly regulated markets, one of the greatest transfers of wealth in American history. The primary beneficiaries have been existing landowners including a very large percentage of affluent boomers. The ones who have paid have been less affluent renters, younger people and all future generations of prospective homeowners.

The existing homeowner in the Bay Area could watch the value of his house soar from a few hundred thousand dollars up into the millions without lifting a finger. Meanwhile the dramatic rise in land prices, because it has not been accompanied by a corresponding increase in salaries, has devastated the prospects of young couples, many of whom were forced to either leave the area or obliged to take on huge mortgage debt just to afford an entry level house. These same people are now bearing the brunt of the steep decline in housing prices and the wave of foreclosures washing over the country.

One of the most remarkable things about this enormous transfer of wealth has been how little most people were aware that it was happening or what caused it. A few people – notably Bernard J. Frieden in his book The Environmental Hustle from 1979 – had sounded the alarm. More recently Wendell Cox and Hugh Pavletich at Demographia.com have made a similar case using substantial data from cities in the English speaking world. Although all of these observers have been dismissed as free market enthusiasts, more mainstream commentators – like Edward Glaeser of Harvard and Joseph Gyourko of the University of Pennsylvania – have embraced this theme. Even the noted liberal economist Paul Krugman has joined the chorus, comparing the moderate land prices in the “flatlands,” meaning lightly regulated places like Texas, with the extremely high prices in the “zoned zone” or places like heavily regulated coastal California.

This leads us to the great challenge we face now keeping families in their homes. The sad truth is that in areas where housing prices have vastly outstripped incomes there may no easy way to do this. In many markets either housing prices will need to fall quite a bit further or income will have to rise substantially, and there is little likelihood – particularly with this weak economy – of the latter happening any time in the near future.

One good thing that might come out of the current crisis, though, is a recognition that regulations, however well-intentioned, can come at a price, sometimes a high one, for some parts of society. I doubt very much that the boomer generation ever intended to create the current housing bubble or enrich itself at the expense of less affluent families and generations to come. This was the unanticipated consequence of a genuine desire to create a better life for everyone by individuals who, probably inevitably, defined the good life as the kind of life they themselves wanted. In many ways they succeeded all too well. We can only hope this downturn will at least open up a new chapter in the discussion of the bittersweet story of a generation that set out to remake the world.

Robert Bruegmann is a professor of Art History, Architecture and Urban Planning at the University of Illinois at Chicago. His most recent book, Sprawl: A Compact History, published by the University of Chicago Press in 2005, has generated a great deal of discussion worldwide.