The American Mortgage Is An Investment In Inequality

The institution of homeownership in America is a finely tuned wealth-building machine for the wealthiest and whitest, first and foremost.

Tyler Comrie for Noema Magazine
Diego Aguilar-Canabal is a legislative assistant for the City of Berkeley and a co-founder of Berkeley Neighbors for Housing and Climate Action.

America is collapsing under the weight of its own injustices. The more our leaders bend over backward to further enrich the most affluent, the more everyone else will suffer at rock-bottom. Nowhere is this more visible than the supposed progressive bastion of California. Facing losses of tens of billions in the state budget due to the COVID-19 pandemic and resulting economic depression, the state’s Democratic supermajority remains committed to defending wealthy property owners while the least fortunate in society face another round of austerity.

In May of last year, when it became clear he didn’t have enough votes, Assembly member David Chiu (D-San Francisco) pulled his bill that would have cut the state’s mortgage interest tax deduction on second homes and redirected funding to support critical homeless services and affordable housing programs. This is the second time Chiu’s effort to eliminate the deduction failed. Unlike normal legislation, any bill that raises taxes requires a two-thirds vote to pass — an aftereffect of the state’s deference to property owners.

Meanwhile, in response to unprecedented pandemic-induced economic hardship, last August, the California legislature passed watered-down tenant protections that left gaping loopholes in the law and resulted in some evictions proceeding anyway.

A troubling pattern emerges: The status quo protecting affluent property owners cannot be undone, but meager scraps to support the poorest are too much to ask.

If you own a house in California, you have plenty of reasons to prefer things this way. If you are a middle-class white person born between the 1930s and the early-to-mid-1970s, homeownership in the United States is a sweet investment, if you can get it. It’s even sweeter in California, where the 1978 “tax revolt” and passage of Proposition 13 helped institutionalize homeowner power and restricted new entrants into the housing market. For everyone else, it has been a raw deal.

This is no accident of history. The American national housing market, by nature, expands racial and class inequalities. The affluent, older white homeowner — the demographic that votes in the largest numbers in every election — is invested in the status quo and reaps huge dividends as inequality gets worse.

“The status quo protecting affluent property owners cannot be undone, but meager scraps to support the poorest are too much to ask.”
Subsidizing The Squires

California is ground zero for the housing crisis today, but it is also where the neoliberal Reagan revolution first spawned and flourished. California’s tax code has been jerry-rigged to reward the wealthiest incumbent landowners when the economy booms, leaving everyone else holding the bag. Proposition 13 capped property tax rates as well as assessments on the taxable value of a property, irrespective of market value. This rewards the wealthiest property owners who bought decades ago. Perversely, we reward them with lower taxes the longer they hold onto increasingly valuable property.

In 2018, the California Housing Partnership reported that the state provided 15 times more subsidies for homeowners than for renters. Incumbent homeowners receive perennial tax cuts that shift the state’s tax burden further onto income and sales taxes, disproportionately burdening the poor and middle class. State services like schools, hospitals, affordable housing, food stamps and unemployment insurance rely more and more on the incomes of workers and the unpredictable fortunes of the stock market. While the costs of goods and services rise during economic expansions, landlords and homeowners reap the rewards from rising land values, while workers see their pay raises absorbed by higher rents.

As property values rise, assessments and tax rates remain fixed; inflation and a tight housing market gives property owners bigger tax cuts the more quickly their wealth increases. For example, a million-dollar house purchased in the 1970s may be only officially worth $100,000 in county tax records. The “assessed” value sets the denominator on which property taxes are billed, and Proposition 13 prohibits assessments from increasing more than 2% per year unless ownership changes. Thus, the owner of a house worth millions of dollars today may be paying pennies on the dollar if they bought decades ago, while the new buyer of a cheaper house may have a much higher tax bill. Households in some of the state’s most affluent coastal cities — Palo Alto, Malibu and Beverly Hills — get the biggest breaks. Homeowners in poorer areas just a short drive inland — Palmdale, Indio and Hercules, for instance — pay some of the highest taxes in the state as a share of their property values.

Aside from capping property taxes, Proposition 13 also required supermajorities to approve new taxes — two-thirds in the legislature for new state taxes and two-thirds of the popular vote for local taxes. Through this diffuse fiscal system often beholden to voter turnout, it’s harder to hold politicians accountable for delivering the public services we demand of them.

Proposition 13 passed in 1978 as a campaign to protect homeowners on fixed incomes from higher tax bills that were falling prey to the decade’s runaway inflation. The proposition campaign insisted landlords would lower rents thanks to the tax cut, but that didn’t happen at all. Demand remained high for rental housing, so landlords pocketed their tax savings and even raised rents, spurring several movements for rent control throughout the state. The cantankerous conservative Howard Jarvis, one of the lead architects of Proposition 13, had previously been a lobbyist for landlord groups.

Corporate landowners have hardly returned the favor. Shortly after Proposition 13 passed in June 1978, Governor Jerry Brown’s office received over 13,000 calls to his “renter hotline” complaining of rent hikes, according to historian Robert Kuttner. State Assembly Speaker Leo McCarthy, recalling that time, once joked to Kuttner: “We referred them all to Howard Jarvis.”

Last November, California voters narrowly rejected Proposition 15, which would have removed constitutional assessment caps for large commercial properties and redirected billions in tax revenue to local schools. This suggests that a significant margin of voters identify more closely with the material interests of corporate landowners such as Disney or Chevron than with renters or schoolchildren. 

Dividends From Segregation

With demand remaining high and supply of new housing constrained in affluent white neighborhoods, workers sought housing further out and endured longer commutes. Realtors encouraged new homebuyers to “drive until you qualify” (for a loan). Meanwhile, pre-1978 property owners enjoyed tax cuts and rising asset values.

Throughout this history, Black-owned asset wealth was systematically devalued. The Home Owners’ Loan Corporation, established in the 1930s to refinance loans for distressed homeowners after the Great Depression, left us with detailed maps covered in infamous red lines that surrounded Black and minority neighborhoods that were denied government-supported credit. Divestment from Black neighborhoods ensured that they would be poorer and, in turn, riskier for lenders — a negative feedback loop giving the appearance of a system that simply rewarded responsible and industrious households appropriately.

Snob zoning” laws not only kept property values high — they also maintained the divisions once enforced by racial covenants by sublimating the pattern into mere class segregation. Turns out, when cities limit development on valuable acreage to detached suburban bungalows, limit the number of stoves allowed in houses and force land and water to be wasted on ornamental lawns, they set a price floor on housing that exceeds what most workers in the region can pay. As the University of California, Merced scholar Jessica Trounstine writes in a recent study, “Cities that were whiter than their metropolitan area in 1970 are more likely to have restrictive land-use patterns in 2006.” By studying municipal elections, she also found that “white voters are more likely to support restricting development in initiative elections and that whiter cities have more stringent land-use regimes.”

“California provided 15 times more subsidies for homeowners than for renters.”

Like racial covenants before them, these laws are predicated on the idea that Black residents, Asian and Latino immigrants and lower-income renters devalue white real estate assets because they are poorer; in excluding them, the cycle of poverty and inequality continues. The regulatory framework rewarding white supremacy through homeownership creates a social reality that determines and is reinforced by financial reality.

In a campaign speech last summer, Donald Trump attacked Joe Biden over efforts to “eliminate single-family zoning.” “Your home will go down in value,” Trump claimed, “and crime rates will rapidly rise.” In the speech, the Republican president was not expressing a uniquely Trumpist aberration, though he and his father were both segregationist real-estate developers benefitting from government largesse. Rather, he was appealing to white property owners in exclusive suburbs by publicly attacking and later repealing the Obama-era Affirmatively Furthering Fair Housing rule, an administrative toolkit for evaluating racial and class integration across municipalities. This same rule was roundly attacked during the Obama years by former local politician Dick Spotswood in op-eds in local newspapers in deep blue Marin County, California, the affluent and majority-white region once home to Governor Gavin Newsom.

Trump perceived that white homeowners instinctively know how this system works and that their property investment may be at stake. Their retirements and their children’s economic opportunities are invested in shares of segregated capitalism, and segregated capitalism makes sure it pays dividends. Scarcity and subsidies both prop up this pyramid scheme, reinforcing the country’s racial wealth gap. The mortgage interest tax deduction makes perfect sense within this policy regime.

“Households in some of the state’s most affluent coastal towns — Palo Alto, Malibu and Beverly Hills — get the biggest tax breaks.”

The regressivity of the mortgage interest deduction is almost comical in scale. Sociologist Matthew Desmond noted in early 2017 that lower-income households often don’t benefit from the deduction at all because they take the standard deduction rather than itemizing their tax returns. As a result, “households with at least six-figure incomes receive more than four-fifths of the total value of mortgage interest and property-tax deductions.”

We can fairly assume that this particular tax benefit wasn’t explicitly designed at first in 1913 to grow racial and class wealth divisions through homeownership, but merely to allow businesses to deduct interest payments on loans from their tax burden more generally. Owning real property was much less common back then. But as homeownership expanded through large federal programs for segregated mortgage insurance and loans for suburban development, it matured into part of the regressive policy toolkit that molded white American households into effectively their own atomized real estate investment firms.

This complex Tetris game of incentives and subsidies didn’t just redistribute wealth; it has also created a new dynamic of class differences along racial lines. In an exhaustive history of postwar Oakland, Robert Self observed that homeowners “came to accept as natural the conflation of whiteness and property ownership with upward social mobility.”

These household safety-net investments were rigged from the start to exacerbate racial inequalities. The Federal Housing Administration fashioned itself as an instrument of white supremacy by refusing to insure mortgages in urban centers with even a hint of Black people. In one infamous case, the F.H.A. refused to provide mortgage insurance to a white neighborhood in Detroit until a developer built a concrete wall separating it from the adjacent Black neighborhood.

“White homeowners’ retirements and their children’s economic opportunities were invested in shares of segregated capitalism.”

As early as 1955, city planner and fair housing lawyer Charles Abrams lambasted the F.H.A. as “the protector of the all-white neighborhood” with “a racial policy that could well have been culled from the Nuremberg laws.” Democratic Senator Paul Douglas reported in 1968 that lower and middle-class neighborhoods, “together constituting the 40 percent of the population whose housing needs are greatest, received only 11 percent of the F.H.A. mortgages.”

Policymakers during the inflation of the 1970s deliberately chose asset inflation — primarily through appreciating home values — as their preferred method for building middle-class stability and wealth. Australian academics Lisa Adkins, Melinda Cooper and Martijn Konings observed in a study of the 1970s how “workers found they could compensate for stagnant wages by borrowing their way into asset ownership.” Homeowners staged a tax revolt against inflation by joining a deflationary political block and trading wages for ever-appreciating home equity. Under this deflationary regime, consumer prices and wages fell while capital markets boomed. But we all know how the trick of trickle-down economics works now — that eager capital flowed primarily to landlords and rent-seekers, not to workers or infrastructure. The gains of economic growth accrued to a privileged caste hoarding real resources, not to producers.

The common man — archetypally and statutorily, the white man — was promised an opportunity to buy into this investment scheme themselves, and buy in they did. White middle-class workers invested in capitalism by buying a house, and the house in turn would make them capitalists. Instead of a social safety net, people were encouraged to just buy a house — that would be their safety net. Now, this structure is so calcified and so popular among voters that even the lowest-hanging fruit of cutting a state tax deduction for second homes is untouchable.

Killing The Golden Goose (For Thee, Not For Me)

Some have argued that prosperity itself is to blame for this perpetual disaster. But growth doesn’t have to exacerbate inequality. Choking off prosperity writ large may sound intuitive and appealing, but it will not undo these injustices.

Sociologist Harvey Molotch coined the term “growth machine” in a 1976 essay, “The City as a Growth Machine,” which famously argued, “Growth likely increases inequality within places through its effects on the distribution of rents.” Sure enough, California has the highest poverty rate (when adjusting for housing costs), the most billionaires per capita, the highest share of homelessness in the U.S. and the largest population of any state.

By tacitly sidestepping the incentives of America’s white supremacist welfare state, which provides a secure future contingent on appreciating home values in white neighborhoods, Molotch and his followers tend to assume causation in the wrong direction. Growing cities “means larger numbers of bidders for the same critically located land,” he proclaimed, “inflating land prices relative to wages and other wealth sources.”

But it is the preconditions of homeownership as a lucrative investment that lead growth to distribute unevenly across racial and class lines. While this is a defining feature of American neoliberal capitalism, it is hardly a necessary precondition for growth itself. As Molotch argued, more growth simply begets more assets, ceteris paribus, and the wealthy greedily suck them up. Left unsaid is the fact that even without real growth, American households are conditioned to pursue ever-greater asset appreciation. With a disproportionately rich and white homeowner class plowing their life savings into personal real estate assets, their wealth grows as houses get more expensive relative to wages.

Perhaps as a natural consequence of these incentives, some Baby Boomers who were lucky enough to buy housing in urban California in its prime adopted deflationary, anti-growth politics. While many fortunate property owners complain that future growth cannot cover the costs of increasing public services — more traffic and potholes, more workers riding public transit, more students in schools, etc — this same class benefits disproportionately from Proposition 13’s perpetual tax breaks. Meanwhile, those public services strain under the chokehold of their subsidized asset appreciation, rather than growth itself. Their rhetoric casts growth as a zero-sum game — the only way to protect workers in cities like San Francisco is to ensure there are fewer of them.

“Instead of a social safety net, people were encouraged to just buy a house — that would be their safety net.”

While federal mortgage insurance has shaped class politics, anti-growth homeowners have sought to shape their own favorable polity. Calvin Welch, an architect of San Francisco’s low-density zoning and zero-sum nonprofit housing programs, once said as much at a local Sierra Club meeting in 2017. To organize opposition to a new apartment building, he urged the club to remember: “Who lives here is who votes here.” At the time, the local chapter of the club was discussing how to oppose a development at a parking garage and former radiator shop — potentially by attempting to designate it as a historic landmark.

Welch and his allies often argue that new privately built housing raises the cost of housing overall, and in the 1970s, Welch organized to prohibit higher-density apartment buildings in the Haight-Ashbury district. Back then, he expressed incredulity at the neighborhood’s middle-class Black population and their aspirations toward homeownership. Ironically, he correctly predicted that reducing the permissible density of the Haight-Ashbury would raise property values, contrary to his present-day views.

Welch remains one of the local political establishment’s top leaders in shaping anti-growth housing policies, writing ballot measures and advising City Hall on local legislation. Last year, he complained to the San Francisco Chronicle that the University of California, San Francisco’s plans to build a new hospital with workforce housing would bring new jobs to the city. The public medical school and research institution, he scolded, was a “growth machine.” If current homeowners get richer by growing home values, his argument goes, and most of that wealth goes untaxed, that’s fine; if wealth grows more visibly in the form of higher-paying jobs and new construction, that, the story goes, is the growth that causes inequality.

What’s good for these geese is good for their gander, but killing the golden goose has done nothing to eradicate white supremacy itself from the flock.

These rentier preferences can often be disguised as progressive rather than conservative by embedding unequal distribution assumptions in growth itself rather than in the laws that enrich white asset owners. When critics conflate land and asset prices with population growth and “urban scale” — whether it’s increased density in residential neighborhoods or just new construction overall — they can justify all sorts of curmudgeonly nonsense, like opposing hospitals for having too many jobs. Yet the “urban scale” of California has grown far more slowly than its population, economy and housing costs. Visible “growth,” with its tangible benefits, has been sublimated into higher asset prices. This has had dire consequences, including California’s exploding homelessness rate. It’s the most expensive state for renters, ergo the most lucrative for property owners.

If their neighborhoods changed little, they could retain their bountiful access to credit and asset inflation. An influx of high-wage renters, however, destabilizes the social status of organized homeowners and threatens their political monopoly on local decisions. Homeowners who have benefited from the white supremacist investment scheme may be leery of real economic growth in part because they enjoy asset inflation without changes to the aesthetic comforts of racially homogeneous suburban dwelling, the original lynchpin of the F.H.A.’s wealth-generating machine. They have no problem with that particular growth machine.

But just as one would not blame a bank teller for a bank robbery, it makes no sense to blame growth writ large for distributional injustice. The white supremacist caste system is already baked into the American homeownership pie, with access to capital and land still largely segregated by race. By tying household asset wealth to basic shelter, and these constructs with whiteness, the investment scheme of American homeownership is unsound, unjust and destined to collapse.

Shelter is not like the stock market, and households do not behave like shrewd investors: Nobody in their right mind would accept the risk of an investment gamble if the downside were to lose one’s shelter and livelihood. Instead, they form deflationary political coalitions and push for policies to protect their investment, and the collateral would be pushed down the pyramid scheme through the path of least resistance (i.e. lower social status) onto minority homeowners, tenants and the working poor. After all, if a cute house and a white picket fence in a segregated neighborhood were your only ticket to security and comfort for your loved ones, what would you do?

“This structure is so calcified that even the lowest-hanging fruit of cutting a state tax deduction for second homes is untouchable.”

Efforts to dismantle structural racism and white supremacy must include undoing the financial incentives people have to defend the status quo in their communities. Even well-meaning white liberals who profess support for the civil rights movement might staunchly oppose racial integration in their children’s schools and in their neighborhoods — and it doesn’t seem like a total coincidence that they have literally bought into a retirement fund-sized roof over their head, one which steadily appreciates so long as the system remains segregated and inequitable.

Nevertheless, the continued concentration of wealth among a powerful, elite, asset-owning class has only accelerated under the COVID-19 pandemic, which has liquidated countless small businesses and hurt millions of workers under a haphazardly administered economic quarantine. American households need better financial security through a stronger social welfare state that guarantees basic needs and a good quality of life, regardless of wealth qua whiteness. President Biden’s massive proposed public investments in housing, elder care and green energy technology, for example, is a good start.

In the Molotch and Welch view, a New Deal-style industrial jobs program and infrastructure plan is just another growth machine bidding up land prices and accelerating gentrification. But the landed gentry capturing the material gains from growth is a policy choice just like deflation, not an inevitable plague of locusts. Better outcomes are possible: While increasing affordable housing production, cash assistance for the poor and eviction protections for renters, the federal government can push states and local jurisdictions to undo segregationist McMansion zoning in affluent neighborhoods and reallocate regressive tax breaks for mortgage interest to progressive rental subsidies for the poor.

The tide is slowly turning. In January, the University of California Board of Regents approved UCSF’s planned hospital development, with a new medical center and 1,263 affordable homes, over the impotent protests of local politicians. In some respects, the anti-growth machine may be gradually losing its grip on institutional power, “inshallah,” as Biden is fond of saying — “God willing.” If so, it may be because average Americans are increasingly becoming aware that they were never invited to partake in the spoils of white land ownership in the first place.

As voters and as human beings, we should consider how we personally benefit from structural injustice and take a hard, painful look at our shared values and the material outcomes that result. We must be willing to sacrifice some of our unearned privilege so that others may share in our prosperity.

For better or for worse, it all starts with a roof over one’s head.