The American Dream That's Not Backed Up by History

The U.S. was a nation of home renters until after World War II.

Last week brought the news that home ownership rates continue to slide, with over half the nation’s largest cities now dominated by renters. The decline is particularly pronounced among millennials: Only 31 percent of adults under the age of 35 own their own homes, with further declines likely in coming years.

It’s tempting, perhaps, to read this trend as yet another sign of national decline. Home ownership, after all, is arguably the most visible symbol of the American dream.

But dreams don’t necessarily reflect historical reality. In the U.S., renting has long been an acceptable, and in some cases, preferred alternative. In fact homeowners did not eclipse renters until after World War II.

It’s difficult to know with any precision exactly how many Americans owned their homes before the U.S. Census began asking citizens about it in 1890.

But estimates from some historians yield an approximate home ownership rate of around fifty percent in 1860. That sounds high until one factors in that approximately 80 percent of Americans lived in rural areas at this time, and many owned land because it was the source of farming income. That they owned a house, too, was almost an afterthought, not the result of some dream. They weren’t homeowners first and foremost; they were landowners running a small business.

Those who didn’t need land, like city dwellers, rarely bothered to purchase a home. In 1860, only 11 percent of Philadelphia residents owned their homes; other cities had higher rates, but none topped 31 percent. That number would rise very slowly over the remainder of the nineteenth century, but it still remained stuck at relatively low levels.

The degree to which renters dominated cities became apparent on what was sometimes described as “Moving Day.”  On this fateful date, those who wanted to move to a better apartment (or who couldn’t afford a hike in the rent) would schlep their stuff to new digs.

New York City was particularly infamous for this ritual. In the 1840s, the diarist George Templeton Strong recoiled in horror at the “chaotic state” of the city as it began its annual game of musical chairs. “Every other house seems to be disgorging itself into the street,” he observed, likening nomadic New Yorkers to “the pastoral cow feeders of the Tartar Steppes.”

Given these headaches, why didn’t more people buy a house? One obvious obstacle was financing: most mortgages required a significant down payment with the balance due -- a so-called “balloon payment” -- at the end of five or ten years. Assuming that was the case, people with greater financial resources should have had higher rates of home ownership.

But that’s not what happened. Historians who have looked into the issue have found that rates of home ownership varied little from class to class. One study in Detroit in 1900 discovered that 34 percent of unskilled laborers owned homes. Nearly the same number -- 37 percent -- of high-status, white-collar workers owned homes.

It seems that the white-collar, affluent professionals who now put such stock in home ownership didn’t at this time. As one historian has put it, “employing servants was a higher priority than owning a home.” If anything, working-class families held home ownership in higher esteem than the middle and upper classes.

While home ownership became increasingly popular in the early twentieth century, the U.S. was still a majority-renter nation in 1930, though by this time homeowners numbered 48 percent of the total population. But the Great Depression knocked that figure back down to 43 percent, roughly on par with late nineteenth century levels.

Things changed dramatically in the 1940s, when home ownership levels began moving toward unprecedented highs, hitting 66 percent by 1980. Economists are still arguing over why that happened, but the most compelling explanations are pretty banal and do little to support the sentimental blather associated with home ownership.

Government intervention in the housing markets was the driving force behind this change. This began in the 1930s, when the Home Owners’ Loan Corporation dispensed with the balloon payments by more or less inventing the modern-day, fixed-rate long-term mortgage.  Eventually, the Federal Housing Administration and the Veterans’ Administration (via the GI Bill) guaranteed and insured mortgages, making financing relative easy.

Taxes played a role, too. While the mortgage interest deduction had been around since the birth of the income tax, it wasn’t until marginal tax rates ticked upward during World War II that home ownership began paying significant dividends to middle and upper-class households.

All these changes made home ownership the norm in the postwar era. In the late twentieth century, creative financing helped drive the home ownership rate even higher. It topped out at close almost 70 percent in 2006 before beginning a slow, inexorable decline that continues to this day.

Stagnant incomes and the aftershocks of the housing bust are driving some of the recent trend back to renting. But the slide may also reflect a growing awareness that investing most of your wealth in a single, immovable, illiquid asset isn’t such a good idea after all. Renting, by contrast, permits far greater flexibility and geographical mobility, particularly when it comes time to change jobs.

The U.S. was once a nation of renters. It could be again.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

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    Stephen Mihm at

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