IN THE PAST 10 YEARS, A HUGE number of Americans has become richer (at least on paper) than any of them ever believed possible. The housing boom, with its seemingly endless demand and short supply, has pushed housing prices (and therefore home equity) through the roof in most regions of the United States. With low-interest rates holding, and rosy forecasts from almost every economist with a conduit to the media, the American dream of homeownership for all seems to be chugging ahead at full steam.

But behind the boom times lies a deep malaise. Many Americans, young, old, poor and middle class, cannot afford to buy a home—especially not a new home —in their own neighborhood. They have been left behind by the real estate gold rush. To make matters worse, their real income is sinking as those who own homes rake in the equity worth. The result: a widening income gap. A study by the California Association of Realtors found that 70 percent of all home sales in the state last year went to repeat home buyers averaging $100,000 in income. And a new report from the National Housing Conference in Washington suggests that homeownership is actually declining among middle-income Americans. Are we becoming a nation of haves and have-nots?

According to the Harvard Joint Center for Housing in Cambridge, Mass., more than 14 million American households now spend more than half of their income on housing. You've probably heard similar statistics from a wide spectrum of groups—from housing advocates such as the Center for Housing Policy, the research affiliate of the National Housing Conference (NHC) in Washington, or the NAHB. The NHC's latest report found that six out of 10 working poor families not only pay too much for rental housing but also can't find enough to go around. In 2002, homes lost to foreclosure grew to a record high of 1.2 percent of all mortgages, with more trouble expected in 2004 as interest rates rise, removing the option of refinancing to avoid bankruptcy. “More people this year will end up bankrupt than will suffer a heart attack or be diagnosed with cancer or graduate from college or file for divorce,” notes U.S. News & World Report.

Another social ill has resurfaced for the first time since about 1929: household overcrowding. According to the NHC and the Harvard Joint Center, immigrant families and the working poor have been squeezing into smaller digs, commuting farther to work, and losing ground in their struggle to claw their way into a better life.

At the same time, the median home price continues to rise (more than $200,000 at this writing), outpacing income growth in most regions. And in high-demand places such as New England, California, or Maryland, first-time homeowners can rarely find a home within their financial reach.

“Most of the demand for new homes is coming from existing homeowners, not first-time buyers,” notes Nicolas Retsinas, director of the Harvard Joint Center. “And the relationship of renters to housing has changed. At the low end of rentals, no one told them we went through a housing boom.” These families, he says, don't have the capital to buy a new home, even with the low interest rates. What's more, even those who can make the leap face growing financial risks due to other forces, such as rising utility rates and property taxes.

“What we're seeing is that it's the luxury apartment dwellers who can easily buy a home, not the traditional renters,” he adds.

So what happened to the American dream of upward mobility for all?

Out Of Sync “Evidence is mounting that realizing the American dream [of ever-increasing prosperity] has become an increasingly rare experience,” writes Richard Leone in the American Prospect, a bimonthly journal. “Studies show very strong correlation between the earning levels of fathers and sons over time, with relatively few children moving from the middle of the income spectrum to the top.”

As a result of that middle-class wage stagnation, our economic balance in the United States has become severely lopsided. If this trend continues, new-home construction could become even more out of reach. As a builder, you may already be serving a one-niche market, where new homes are affordable only to affluent buyers already in the homeownership game. That's bad news for the economic health of any region, according to the NHC and other housing advocates. At a recent roundtable held by the Urban Land Institute, based in Washington, a wide spectrum of business leaders and politicians noted that economic growth and decline are directly linked to the availability of affordable housing.

Combine the affordable housing shortage with sharply increasing property taxes, and the outsourcing of jobs to other countries without equitable replacement, and you begin to see the powerful economic obstacles that have low- and middle-income Americans pinned to the mat. At the same time, as the stock market has stumbled, the majority of families who already own homes have become more fearful. About two-thirds of their personal debt resides in home equity, roughly $6.8 trillion. That figure has risen 64 percent from what it was five years ago, in part because of low interest refinancings—which often rest upon riskier adjustable rate loans. The housing boom may have made a lot of people a lot richer on paper, but that income is meaningless until they sell their homes—and they know it. The result: even more NIMBY-ism when it comes to new housing in their neighborhoods.

Retsinas says that “the government now serves two constituencies—the people desperately seeking affordable housing and the well-housed people who fear the solutions. So long as one constituency does not see this crisis as a crisis, government is unlikely to act.”

Prosperity Myths “There's a growing structural imbalance in the economy,” notes Conrad Egan, president of the NHC. “Our new report documents what's really going on. Home-ownership rates are actually declining among middle-income families. No one has seen that for a long time.”

The report, “Working Families With Children: A Closer Look at Homeownership Trends,” found that the homeownership rate for all families with children was 70.5 percent in 1978, but that rate decreased to 68.4 percent by 2001. “Among working families with children,” researchers add, “the homeownership rate declined from 62.5 percent in 1978 to 56.6 percent in 2001. In comparison, a total of 68.3 percent of all households owned their homes in 2003, increasing from 65.2 percent in 1978.”

Egan notes that those high overall homeownership rates bear little connection to social equity. “Going back 20 years, homeownership was 65 percent,” he says. “So it's grown 4 percent in 20 years. That's not that big of a change.”

He adds that “most of the new jobs being created are at the upper end and at the lower end. It's what The Wall Street Journal calls the ‘barbell effect.' But at the low end, you have what I call the Wal-Martization of labor, where the new jobs, on average, bring in $9,000 less than the jobs they're replacing. At the same time, land prices are rising geometrically, and home prices are following land.”

Indeed, between 1990 and 2001, the nation's median home price grew twice as fast as the nation's median income. As a result, the purchase of a new home is shifting inexorably toward more affluent buyers. And naturally, home builders have followed that trend.

Even at the high end, however, a few cracks have appeared. For example, the luxury multifamily niche appears to have overbuilt its market.

“You might have heard the president talking about the fact that vacancies are on the rise,” Egan says, “but what's happening is that vacancies in rentals are growing in luxury developments, not in the affordable range. In most markets, moderate-income rentals are in short supply. Often, if a higher vacancy rate occurs, it's because people can't afford the current rates.”

Douglas Bibby, president of the Multi-family Housing Council based in Washington, adds that homeownership should not be treated as the Holy Grail for every American. Some people, he says, simply prefer renting. Others don't have the financial stability to absorb the uncertainties of the many costs associated with ownership.

“The groups projected to grow the fastest between now and 2010 are the ones most likely to choose apartment living,” says Bibby. “If America does not adapt its housing policy to address these realities, our policies will prevent us from solving other pressing housing problems, such as the growing affordable housing crisis, suburban sprawl, and urban decay.”

Builders of apartments and condominiums, Bibby adds, often suffer most from backward zoning laws and NIMBY resistance.

To be sure, times are good for most home builders. But as our writers peel back the layers in this special report, it's clear that severe economic inequality combined with the current demand/supply imbalance are eroding the housing market from the bottom up. Unless serious political and personal capital is invested in removing zoning laws, overcoming NIMBYism, controlling property taxes, and generally sharing both the wealth and the burdens of society, our familiar social fabric may further unravel.

Fear Factor Sudden wealth gained through rocketing equity has made NIMBY homeowners even more protective of their comfortable neighborhoods.

Inequity has always been a part of American society. But what makes this situation different is the extreme nature of the stratification—into two very separate layers—rich and poor. But don't look to the haves to open their checkbooks (or their neighborhoods) to the have-nots and save the day. As social critic and author Bill Maher notes, it has been a long time since anyone asked today's fortunate homeowners what they might do for their country. To the contrary, we instead subsidize the wealthy with tax cuts, at the same time cutting social and housing programs (see “Behind the Spin,” page 134).

“It would cost them so little of their comfort to alleviate a great deal of the abject misery in the world,” Maher writes, “but even a little bit is too much for them.” He adds that “we do, upon reaching a very high comfort level, mostly choose to go from 10 to 11 instead of helping another guy far away go from zero to one.”

That unfortunate side of human nature has been magnified by the sudden, unexpected wealth that has been created by the housing boom. Nicolas Retsinas, with the Harvard Joint Center, points out that the boom continues to make many Americans richer than they ever imagined. In fact, he notes, “many long-time homeowners could not afford to buy their own homes at today's prices.”

But why raise the bridge when less-fortunate citizens want to join the neighborhoods? Retsinas narrows it down to three unflattering fears shared by many homeowners:

  • Fear of Children. Homeowners know that schools typically siphon away most of their property taxes. They fear the “education effect” and believe that more affordable housing will attract families with children, and frankly, they'd prefer lower taxes to child-filled neighborhoods.
  • Fear of Depreciation. This one's an old favorite, spawned by persistent (and largely inaccurate) stereotypes that associate higher density with lower property values—which means loss of equity in their homes. (See “Myths of Density,” March, page 140, for more on this topic.)
  • Fear of Paradise Lost. Homeowners like their suburban communities just the way they are and fear that any introduction of affordable apartments or townhomes will ruin their little piece of Eden. As a result, Retsinas says they “thwart the market.” If supply followed demand, he says, many more apartments would be built in the suburbs, following the shifting job scene.
  • Under Siege

    Builders in popular destinations such as Cape Cod, Mass., are facing a powerful backlash from NIMBY homeowners who don't want to share.

    Cross the narrow bridge and head out the long stretch of Route 6 that bisects Cape Cod during the off season and you might never know that many residents of this famous peninsula face dire affordable housing problems. The combination of a highly desirable location, archaic zoning, and limited land resources has made the Cape almost exclusively the playground of those who can afford second homes and expensive summer vacations.

    But that affluence has also hammered the region's builders, who face an increasingly hostile part-time population that wants nothing to do with new development—especially not affordable housing, according to Liz Kovach, outgoing president of the Cape Cod HBA. “Once people get here, they want to pull up the bridge,” she says, and they resist new development at every turn.

    “There's almost no multifamily going on,” Kovach notes, “and I think the only affordable product is being built by Habitat.”

    Our BUILDER editors visited the Habitat for Humanity site, where a half dozen, single-family homes look to be nearly complete. Yet, however well-intentioned, such projects barely touch the Cape's affordability crisis. What's needed are hundreds—better still, thousands—of affordable units close to the beach. Dream on.

    A recent investigation by the Cape Cod Times depicts a region in crisis. Less than 5 percent of the region's housing is considered affordable. Service workers, the lifeblood of these resort towns, must often crowd into small homes or apartments. Some spend the summer camping out at a local state park. Many businesses, including some builders, have begun to bus workers in from New Bedford, Mass., on the other side of the bridge.

    Kovach points out that very little land remains on Cape Cod that is zoned for residential use. She counts a total of 21,000 buildable lots, compared with 37,000 estimated by the state a few years ago. And the few lots on the market start at about $180,000 for a one-acre parcel far from the shore.

    But Cape Cod's comfortable residents lack the political will to act. Consequently, most new zoning in the region follows antiquated logic, asking for one- or two-acre lots as the minimum. Builders see the zoning as thinly disguised growth control.

    “We're dealing with the law of unintended consequences,” says Mike Cole, who handles regulatory affairs for the Cape Cod HBA. “The irony is that attempts to control development have driven prices even higher, and on top of that, we've had a huge job outflow. Now, every town wants to restrict the building of additions. Something's got to give.”