Millennials like me were confused and incensed during the subprime mortgage crisis of 2008. We wanted reform. We wanted heads to roll. We got corporate welfare instead. In the ensuing decade and a half, we have listened and nodded along as politicians and news outlets rail against the greed of Wall Street grifters who packaged riskier and riskier mortgages in AAA-rated securities and then peddled them to unsuspecting investors, all the while preparing their own golden parachutes. We’ve all seen The Big Short. We all seem to agree about what happened and who’s to blame.

But this conversation never included a more fundamental issue, one every homeowner I know intuits on some level: housing cannot be both shelter and an investment. As shelter, it is far too expensive; as an investment, its price must go up. This is something Charles Marohn, the founder of the Strong Towns organization, and Daniel Herriges call the “housing trap.” In their new book, Escaping the Housing Trap, Marohn and Herriges lay out the problem and propose a way forward.

Housing as Investment

In the early part of the twentieth century, as building technology and housing quality improved, housing prices swung violently. When the federal government became involved in mortgage lending during the Great Depression, prices began to rise. Housing—or more precisely, mortgage paper—became a financial product. And Americans in the booming post–World War II economy needed something to invest in, generating ever-increasing demand for more mortgages. The need to make those investments safe was used to justify the practice of “redlining,” by which minorities were excluded from lending, and thus from building intergenerational wealth. With the help of these new financial products (along with cars, also bought with new consumer debt instruments), we embarked on what the authors call the “suburban experiment.” We built entire communities from scratch to a finished state and put them under glass using exclusionary zoning. They were only accessible by car, so we invented the strip mall, the shopping mall, the office park, and the hour-long commute.

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In the years since the end of World War II, the cost of housing relative to inflation, as reflected in the Case-Shiller Index, has been on an upward climb. There have been bubbles like the Savings and Loan Bubble of the 1980s and the one that burst in 2008. Eventually, the government stepped in, lowering interest rates and buying bad mortgages, in order to stabilize prices and prevent a more widespread crisis.

But prices did not return to normal after these bubbles burst. After the subprime mortgage crisis, the Case-Shiller Index never again fell to the level it was in 2001, a time when analysts like Stephane Fitch and Josh Rosner were already warning of a bubble. Prices bottomed out in 2012 and then began climbing more steeply than they did in the last bubble. They are much higher now than they were at the peak.

Part of the problem, according to Marohn and Herriges, is that mortgages make bad investment instruments: 

When interest rates fall, the investment value of a 30-year fixed rate mortgage goes up. Someone owning a bundle of mortgages paying 6% annually is going to want to hang onto them when new mortgages are being made at 3%. Yet those are the exact conditions when the borrower refinances, terminating the 6% payment in exchange for a lower-yielding loan. The investor has no recourse but to give up their prized asset. The opposite happens when interest rates rise. Someone owning a bundle of mortgages paying 3% annually is going to want to trade them out when new mortgages are being bundled at 6%. That is exactly when homeowners hunker down. Again, the investor is stuck, this time with lower-yielding paper.

So why invest in mortgages? “Mortgages are at the foundation of our financial system,” the authors continue, “yet they are the worst kind of investment. The reason investors accept such bad payoff asymmetry is because the federal government is committed to keeping housing prices elevated” (emphasis added).

The government and financial institutions have decided that housing is an investment. They cannot let prices fall.

Housing as Shelter

So what is the problem with home prices going up? When housing is thought of as an investment, nothing. But that’s just it: someone has to live in that investment. Twenty years ago, the average American household was spending 23 percent of its income on housing. By the end of 2022, that number was 30 percent. We are in a well-documented crisis of housing affordability.

One of the causes of this crisis, according to Marohn and Herriges, is exclusionary zoning. These policies, which were widely adopted after the Village of Euclid Supreme Court decisions made them legal in 1926, allow governments to decide what land uses are allowed in what areas, and exclude all others. If you live in a detached single-family home, in a neighborhood full of single-family homes, that is probably because zoning ordinances dictate that single-family homes are the only thing that can be built there.

None of us wants to live beside a waste treatment plant or a paper mill. We want laws that prevent those from being built in our communities. But exclusionary zoning does much more than prevent harmful land uses from cropping up in neighborhoods: it prevents neighborhoods from maturing over time. Under the traditional development pattern, communities that thrived would gradually become denser and more various, with property owners converting homes into duplexes and quads, small apartment buildings supplanting rundown houses, and neighborhood-centric businesses opening to serve the community’s needs. None of this is possible under a regime of exclusionary zoning. Whole neighborhoods are now built all at once to a finished state. This is part of what Marohn calls “the suburban experiment.”

There are many problems with this pattern of development. Since home and places of work have been separated by statute, everyone needs a car. People without access to cars—the elderly, children, the disabled, and the poor—are stranded or stuck on inefficient public transit that must cover huge distances because of the low population density. The homes in these neighborhoods tend to be similar in quality and age, leading to de facto socioeconomic—and often racial—segregation.

But why has this led to a crisis in housing affordability? In places where housing is scarce, developers need to be able to build enough housing to keep up with demand, or prices will rise. But in most places that is not legal. If a community cannot add enough housing by adding density—growing upward—it will do so by growing outward.

This outward growth only worsens the problem, because it is fiscally unsustainable, as Charles Marohn showed convincingly in his book, Strong Towns: A Bottom-Up Revolution to Rebuild American Prosperity. When a new suburb is built, it requires a large infrastructure investment. In the best cases, cities get developers to foot that bill. The city gets a sudden influx of property taxes from all that new housing. But roads, pipes, and treatment plants age, and after a decade or two, those maintenance bills start to exceed the tax revenue. Cities experience budget shortfalls and need another influx of property taxes to fill the gap. Marohn calls this the “suburban growth Ponzi scheme.” The problem, as he recently explained in an article about financially insolvent cities, is that “if you lose money on every transaction, you don’t make it up in volume.” Cities can keep it going as long as growth continues. 

But like the classic Ponzi scheme, the moment growth stops, the house of cards comes falling down. The mayor of Houston recently announced that the city’s finances were broken, facing a $160 million budget deficit. Communities across the country are feeling the same squeeze. In Portland, where I live, the Bureau of Transportation is facing $3.5 billion in deferred maintenance on about $20 billion in assets. Taxpayers will end up footing this bill, making their housing even more unaffordable.

A Path Forward?

Bad investing, exclusionary zoning, and the suburban experiment have helped to create the housing affordability crisis. But what is to be done about it? While they offer proposals for dealing with the housing trap, Marohn and Herriges are quick to explain that they are not providing a solution. They caution against the kind of top-down thinking denoted by the idea of a “solution to the housing crisis,” noting that such thinking created the problem in the first place.

But the authors provide several proposals that they believe would stabilize the cost of housing. The most important change is to allow neighborhoods to grow denser by relaxing exclusionary zoning ordinances. They recommend making the “next increment of density” legal everywhere; in a single-family neighborhood, this would mean allowing backyard cottages, duplexes, and neighborhood-centric businesses. And they call on communities to “release the swarm” of small-scale local developers necessary to build enough housing.

Jane Jacobs wrote in The Death and Life of Great American Cities that cities “have the capability of providing something for everybody, only because, and only when, they are created by everybody.” That is the swarm the authors want to release. 

In order for prices to come down, we need to build a lot more housing, and we need to do so fast.


A Breath of Fresh Air

Housing is shelter. Its value as an investment is, if anything, secondary. We do not have enough housing in growing communities right now, and what we do have is far too expensive. In order for prices to come down, we need to build a lot more housing, and we need to do so fast.

We cannot do that without recognizing that this is not a partisan issue. The typical housing advocate is a leftist; the Yes, in My Backyard (YIMBY) movement has not yet caught on on the Right. But this dynamic seems to be in the middle of shifting, as almost every American is feeling the strain of unaffordable housing, and people across the political spectrum are looking for creative solutions. Escaping the Housing Trap is an example of this. 

Marohn, who started the Strong Towns organization in 2009, is not your typical housing advocate. He is a devout Catholic whose political views lean right. This is significant because it has allowed Marohn and his co-author to write a book that will not appeal just to progressives. The authors recognize several principles that conservatives tend to value, most importantly, fiscal responsibility and subsidiarity. Subsidiarity is the understanding, often articulated in Catholic social teaching, that the level of society that is best suited to address a problem is the smallest or most local level. More centralized levels of authority in society exist to support, rather than supplant, the lower levels. In the context of housing, this means that the people most capable of building housing that meets local needs are those already embedded in the communities that need more housing. Large-scale developers tend to build housing that changes communities in cataclysmic ways (and, as the authors point out, creates more NIMBYs). Local developers do not, both because that sort of housing is expensive to build, and because they are hesitant to fundamentally alter their communities. 

The most important thing local policymakers can do to get us out of the housing trap is to encourage this kind of incremental development in every possible way. This means relaxing exclusionary zoning ordinances, allowing so-called “granny flats,” or accessory housing units for extended family, long-term guests, or aging parents, and legalizing the next increment of density everywhere. These proposals are in everyone’s interest because they would allow our communities to grow organically, while bringing homeownership—one of the surest ways of building generational wealth and community stability—within reach of average Americans.

But cities that adopt these changes are not guaranteed success. In my hometown of Portland, we have made some of them but are not building nearly enough housing. Escaping the Housing Trap helped me understand why: you cannot open a door with several deadbolts until you’ve unlocked all of them. Here in Portland, we’ve changed some laws, but we have done nothing to remove the bureaucratic red tape that makes permitting, as I discovered when I tried to renovate my home recently, a nightmare that only deep-pocketed developers and insiders can survive. 

For American families, housing has become too expensive. We can make it more affordable if we build enough housing. But in order to do that, we cannot stop at making it legal; we need to make it easy.

Image by AnnMarie and licensed via Adobe Stock.