American cities are more productive than ever. They facilitate world-changing innovation in information technology, life sciences, and finance, generating enormous wealth. Despite this, they are plagued by serious problems. Crime, low school quality, poor governance, and high housing costs combine to create a quality of life that is significantly lower than pre-tax incomes and overall economic activity would suggest. While the causes of these problems are many and varied, they are to a significant degree downstream of one recurring pattern: the bimodal distribution of real estate ownership.
Most adults fall into one of two categories: homeowner or renter. Homeowners tend to have a large portion of their wealth invested in their home, a single large asset that is typically highly leveraged (at least to start). Renters, on the other hand, rarely have meaningful real estate holdings. There is little middle ground between these two polarized positions.
This divergence means that citywide productivity gains (and productivity more broadly) have starkly different implications for members of these two groups. Productivity gains result in income gains, which in turn increase demand for most goods and services, including living space. Given the prevalence of strict regulation of new development, this demand increase tends to translate more into real estate price increases than into supply increases. This is a boon for homeowners: their homes appreciate in value without requiring any further investment. Renters are not so lucky, as even those benefiting from rising salaries will see a substantial portion of their gains absorbed by rising rents. Those with stagnant incomes will see a decrease in their income net of rent, often forcing them to move.
This results in a system in which economic gains are decoupled from actual productivity. Workers in the industries driving urban economic growth see a large portion of their added value captured by parties who had little role in creating that value, such as the owners of residential real estate. A common complaint among younger workers is that they cannot afford to become homeowners despite earning significantly more than their parents who were easily able to afford homes at the same age.
Many people will, understandably, turn to government for a solution to these problems, but the incentives created by the bimodal ownership of real estate help maintain a political equilibrium that favors ineffective or harmful policies over more productive ones.
Homeowners are rationally risk-averse with regard to the asset that typically makes up the majority of their net worth, and they are notorious for opposing new development that they think might negatively affect its value. Home values are sensitive to countless variables, including many hard-to-quantify ones that stem from the surrounding environment rather than the home itself: aesthetic appeal, demographics, congestion, crime, and school quality, to name a few.
There’s also the basic economic principle of increased housing supply reducing housing prices. If your home value is propped up by artificial scarcity, you may want to maintain that scarcity. Neighborhood meeting structures that require in-person attendance and multi-hour run-times further skew land use decision-making toward stasis by selecting for attendance by older, wealthier homeowners. Coupled with the general logic of concentrated costs and diffuse benefits, these factors make homeowners a powerful constituency that slows development.
The tools employed by homeowners and their representatives in government to restrict development have been slowly accumulating since the mid-twentieth century. Zoning is the most famous one, creating geographic areas in which only a narrow range of building types can be constructed by default. Zoning is typically justified with extreme examples – few homeowners would want to live next to a slaughterhouse, for instance – but in practice it has led to rules that are far more restrictive and less defensible than this. For instance, apartment buildings are illegal to build in 76 percent of San Francisco, and 40 percent of Manhattan’s existing buildings would be prohibited under its current zoning code.
Aside from zoning, historic and environmental preservation rules are regularly used by homeowners and other interest groups to stop new development projects or delay them to the point of economic nonviability. Historic preservation laws have expanded well beyond the protection of famous historical landmarks, often encompassing entire neighborhoods or nondescript laundromats. Environmental protections have similarly been subject to scope creep, such that the notorious California Environmental Quality Act (CEQA) enables lawsuits to be filed against over 40 percent of new housing units proposed in California. In both categories, opponents can file challenge after challenge, taking advantage of the regulations’ ambiguous or subjective provisions and putting the burden of demonstrating compliance squarely on builders. This can add six- or seven-figure sums to projects’ costs and delay their completion by years.
A key driver of the above dynamic has been the emergence of the so-called Baptist and Bootlegger anti-development coalition, wherein moralistic activists side with those who profit from the zoning status quo. Some advocates are motivated by sincere, if misguided, environmentalism or historic preservation, while others use these concerns as a fig leaf for their narrow material self-interest. Distinguishing between members of these two groups can be difficult, and the consequences of their opposition to new housing are the same.
Restrictions on housing supply in America’s most productive metro areas have an enormous impact not just on the economic growth of these regions, but on that of the country. By pricing tens of millions of Americans out of the highest-productivity job markets, the implementation of these rules solely in the New York City, San Francisco, and San Jose metro areas has been estimated to have decreased national GDP growth by 36 percent or more over a forty-five-year period.
In addition to suppressing housing production and economic growth, the ability of activist groups and other third parties to exert effective veto power over new development creates a norm of blackmail and bribery that erodes neutral, transparent rule-of-law principles in favor of opacity and corruption. It’s common for neighborhood groups and their representatives in government to oppose any new construction unless the developer agrees to provide ad hoc funding for their pet projects or other political giveaways.
City and state officials openly acknowledge their preference for this state of affairs over a transparent, rules-based system. One Boston city council candidate and neighborhood association leader recounted his opposition to the construction of affordable housing in a low-income neighborhood on the grounds that its developer refused to provide funding for the construction of a nearby grocery store, ultimately killing the housing project. A senior member of the Massachusetts legislature boasted of his ability to strong-arm local businesses and universities into contributing tens of millions of dollars to rainy day funds administered by neighborhood groups. Programmatic value capture tools can be an effective way to defray the public infrastructure requirements of new development while maintaining a predictable and fair business environment, but this legislator scoffed at the idea of transparent, evenly applied fee systems, pointing out that then he wouldn’t be able to take credit for bringing home the bacon for his voters. These barriers also enable local officials to cram racial preferences into projects.
Aside from being an affront to basic principles of government neutrality, these practices decrease the aggregate amount of development by increasing cost and uncertainty. They also tilt the playing field in favor of large, established incumbent developers, who are more likely to have the connections and war chests to buy assent from local gatekeepers and the legal departments to comply with endlessly proliferating regulations.
Faced with a chronic housing shortage induced by the above supply restrictions, renters often get a raw deal. Access to the high-paying in-person jobs found in top metro areas requires consuming expensive housing, but with down payments out of reach for many young workers, renting is the only option. This creates a class of residents who have little choice but to continue paying for urban living space without any associated ownership stake. In other words, they’re short selling the cities they live in.
With nearly all large cities composed primarily of renters, it doesn’t take a political scientist to tell you that this will translate into voter preferences for short-sighted housing policy. Renters tend to favor nice-sounding policies that will directly and immediately benefit them, regardless of second-order effects. Though less directly obstructive of growth than the land use regulations favored by homeowners, many renter-driven policy preferences nevertheless have significant negative impacts on cities’ economic health and quality of life.
A classic example is rent control. Tenants, frustrated by high rents, are often eager to support any policy that promises to ease this burden. Rent control does, of course, reduce rents in rent-controlled units, but with a litany of destructive side effects. By making rental housing less profitable, rent control disincentivizes the construction of new housing and incentivizes existing rental operators to convert their properties into condos, thereby decreasing the aggregate supply of rental housing. This, in turn, makes the remaining market-rate units even more expensive. Rent control also decreases the quality of rental stock by discouraging investment in upgrades and upkeep. Finally, by incentivizing occupants of rent-controlled units to stay in place, it reduces labor market mobility and, correspondingly, productivity growth.
A striking recent example of the effects of rent control comes from Minneapolis and St. Paul. Known as the “Twin Cities” because of their adjacency and broadly similar characteristics, these cities provide one of the best naturally occurring case studies of the impact of differing policies. St. Paul passed a rent control measure in late 2021, causing an 80 percent decrease in new building permits and the abandonment of previously approved projects by developers. Meanwhile, Minneapolis, which abolished single-family zoning and remains free of rent control, saw building permits nearly quadruple and a corresponding decline in inflation-adjusted rents.
Aside from the macro-level outcomes of rent control, it’s worth considering the human stories that arise from the perverse incentives it creates. Supporters of rent control generally justify it as helping lower-income renters, but in New York City, where rent control has been in place since the 1950s, heritability of a given unit’s rent-controlled status means that established, wealthy families are often its greatest beneficiaries. Some people quit their jobs upon receiving their relatives’ apartments, while others live in rent-controlled apartments while maintaining multi-million dollar homes outside the city. Other units sit vacant, as property owners see no reason to take on tenants for negligible revenue.
Another ostensibly tenant-friendly policy that tends to backfire is inclusionary zoning (IZ). IZ requires that new residential development above a certain size set aside a portion of the newly created units for low‑to-moderate-income households at below-market rents. This may seem like an appealing way to create affordable housing without having to increase government spending, but second-order effects often cancel out or reverse any benefits provided by IZ. Many developers, dealing with narrow margins (especially in the current interest rate and input cost environment), find that lowering the expected revenue for even a minority of their units pushes their projects into unprofitable territory and pull out entirely. This, of course, results in zero new units, affordable or market rate, being built and further constrains housing supply, increasing prices elsewhere in the city.
Many cities and states have also slanted policies governing residential rentals heavily in favor of tenants. These policies make it incredibly expensive and time-consuming to remove nonpaying, destructive, and dangerous tenants, often requiring years of judicial appeals and tens of thousands of dollars in legal fees on the part of landlords. A small minority of tenants have learned the ins and outs of these rules well enough to game the system time after time, living for free in other people’s homes regardless of their actual ability to pay. These protections can even be extended to residents who never received permission from the owner to occupy the property. In addition to the obvious harm to landlords, many of these costs are passed on to other tenants in the form of higher rents and stricter tenant screening processes, making it much more difficult for honest, low-earning tenants to find a place to live.
These renter-driven regulations combine with those favored by nimby homeowners to create an expensive, supply-constrained housing ecosystem. In many cases, governments are then happy to step in to “fix” the problem their policies created by spending tens of billions of dollars on demand subsidies. These giveaways are consistently popular and exist at all levels of government – consider the Biden administration’s mortgage relief credit and down payment assistance, Section 8 and other housing vouchers, state homebuyer programs, and city housing voucher programs. Given housing’s scarcity, this largesse has the effect of driving prices up even further.
This cycle has been described as “cost disease socialism,” in which the cost of essential goods and services is driven up by regulation, resulting in voters demanding subsidies. This approach enriches suppliers at the expense of taxpayers and often leaves consumers worse off on net.
Aside from policies dealing directly with the supply and price of housing, renters’ status as short sellers of their cities can lead them to deprioritize or even oppose other efforts to improve quality of life based on the (accurate) belief that, all else being equal, these changes increase a neighborhood’s desirability and lead to higher property values and rents. This sentiment is sometimes expressed in jest, but it is also frequently stated in full sincerity by a wide variety of actors, sometimes referred to as the “lead paint caucus,” who believe that policing is synonymous with gentrification or that bike lanes cause gentrification. It’s also empirically validated: crime decreases demand for a given neighborhood, and by extension rents, population, and aggregate productivity. In other words, if you have a grudge against your landlord or dislike capitalism more broadly, as many city dwellers do, eroding the urban commons via toleration of theft, open-air drug markets, and outright violence is an effective way to act on those preferences.
These policies are an inversion of the typical governmental social contract in which people pay taxes in exchange for the provision of public goods like transit infrastructure or the justice system. They amount to the exchange of renters’ votes, which constitute a supermajority in many cities, for zero- or negative-sum policies that impair the ability of markets to incentivize productive activity.
The predictable result of these preferences being translated into policy is underinvestment in public safety and amenities. In conjunction with cities’ profligate taxing and spending habits, this often leads people with more moderate policy preferences or who are net taxpayers to depart for the suburbs, leaving behind a voter base that leans further toward the left, which in turn strengthens the electoral odds of progressive politicians. This pattern, whereby politicians push policies that shape the electorate in their favor at the expense of the economic health of their polities, is known as the “Curley effect” after a populist former mayor of Boston and has played out repeatedly in cities across the United States.
These problems have taken on increased national salience in the wake of the 2024 federal elections. Some of the largest rightward shifts in voting were observed in heavily blue cities, where poor governance and outcomes contributed not only to resident dissatisfaction with progressive policies, but also to a broader narrative equating Democratic rule with disorder and high cost of living. This has triggered renewed discussion among center-left commentators about the urgency of fixing urban governance and the need to reduce the influence of unrepresentative activist groups within the Democratic Party. Conflict between these traditional Democratic interest blocs, frequently referred to as “the Groups,” and an array of supply-side reform organizations promoting an “abundance agenda” will be a major dynamic in the coming years.
What, then, can be done to disrupt this dysfunctional equilibrium hobbling America’s cities? Potential solutions fall into two categories: government policies and private innovation.
There are plenty of proposed and, in some cases, implemented government policies that could improve our cities. Liberalization of zoning and other land use regulations, the basic yimby policy tools, would help renters by reducing the proportion of their income captured by property owners. Perhaps counterintuitively, it could also help property owners (or at least landowners, who are in most cases the same people) by giving them the freedom to build more total units, increasing total property value even if per unit values fall.
These solutions are gaining recognition and momentum, as the yimby movement has achieved significant victories in recent years. At the same time, many municipalities and even states are pushing back vigorously. In 2022, for example, the DeSantis administration in Florida recommended that Gainesville withdraw a zoning amendment that would have allowed denser housing in neighborhoods zoned for single-family housing. Courts have also overturned some notable reforms, reflecting the depth of the antigrowth regulatory library.
Another potent yet less popular policy solution is land value taxation (LVT). Unlike the standard property taxes that currently provide the majority of municipal revenue, LVT applies only to the unimproved value of land, not to the value of the structures or other improvements built on it. LVT has several advantages relative to property taxation. LVT does not disincentivize new construction, which would not increase the property’s tax burden, as occurs with property taxes that increase the more you build, and which can easily kill a marginal project. Additionally, because the supply of land is inelastic, the economic impact of LVT falls entirely on landowners, preventing them from capturing a disproportionate share of cities’ productivity.
Despite these beneficial effects, even the revenue-neutral implementation of LVT with corresponding decreases in property taxes would be hugely disruptive, changing the distribution of taxation if not its total amount. Owners of expensive, lightly developed land – for example, single-family homeowners in high-demand cities and suburbs – might see their taxes increase. As these landowners tend to constitute a disproportionately influential group, LVT would be a nonstarter in the jurisdictions that might benefit the most from it.
Fortunately, private actors are stepping in to offer solutions where governments have failed. Some entrepreneurs, fed up with urban dysfunction, are looking to start from scratch on previously unsettled land. California Forever, a corporation founded by Jan Sramek and funded by several Silicon Valley tech leaders, has purchased fifty-two thousand acres within commuting distance of San Francisco with the intent of incorporating and building a new city there, unburdened by the density restrictions and other red tape that constrain much of the rest of the Bay Area. Farther afield, Próspera, a special economic zone on the Honduran island of Roatán, seeks to create a customizable regulatory environment optimized for entrepreneurship, and with a built-in land value tax, to attempt to foster a level of innovation previously unseen in institutionally weak Honduras.
These startup cities may provide promising exit valves for those willing to trade the amenities and social networks of established cities for a blank slate. But they are unlikely to solve the problems of most American renters. Realistically, most people won’t be willing to make this trade until the start-up cities have achieved greater scale, accessibility, and credibility.
To help those who remain behind, it’s necessary to target the bimodal distribution of real estate ownership in existing cities by providing a superior alternative: fractionalized, diversified, and liquid ownership of real estate.
This is not a new concept. Real-estate investment trusts (REITs) and other tools for fractionalized real estate ownership have been around for decades and have become a major part of the institutional investment landscape. Although they have been overlooked by most individual investors, including many of the renting class who have been locked out of homeownership by the high cost of housing, these tools could nevertheless play an important role in addressing both individual financial needs and many of the social problems discussed above.
Homeownership has been a key tool for middle-class wealth-building in the United States for over a century. Families in the past could buy inexpensive homes, enjoy decades of asset appreciation while no longer having to pay rent, and then pass their homes down to their children. Today, high home prices in top metro areas make this ladder to generational wealth considerably less accessible, leaving tens of millions of Americans burning tens of thousands of dollars per year on ever-increasing rent while trying to save up for ever-increasing down payments.
Fractionalized real estate ownership can help people break out of this trap. Many such investment vehicles have investment minimums of $1,000 or less, making this option accessible to a much wider segment of the population than those who can afford a down payment. Using this tool, renters could build real estate wealth incrementally, benefiting from appreciation and dividends along the way. If the assets purchased were sufficiently correlated with the properties in which these investors lived, they could serve as an effective hedge against the risk of future rent increases, with dividends offsetting some or all of the investor’s rent liabilities.
In this way, a renter’s ownership stake in fractional real estate assets could serve as a “liquid home,” relieving the renter of the need to pay rent out of their income in the same way that a traditional home would. Liquid homeownership would have several other advantages relative to traditional home ownership:
Diversification. In any context other than the culturally normalized home mortgage, taking out a six-figure loan to invest in a single financial asset would be considered laughably irresponsible. The value of a single home is highly dependent on the strength of the local economy, making a homeowner doubly exposed along this dimension; a localized downturn could threaten its owner’s employment and home value. Investing in a wider range of real estate assets reduces this risk.
Liquidity. Buying or selling a home is an expensive and time-consuming process, requiring hours spent on research and site visits and tens of thousands of dollars captured by brokers and other middlemen. Fractionalized real estate ownership enables investors to realize gains more quickly while losing less to transaction costs.
Geographical flexibility. Related to the above point, a liquid homeowner can easily move in pursuit of jobs, lifestyle change, or other opportunities without needing to buy or sell a home. It may be the case that a prospective buyer doesn’t believe the real estate in the area where he wants to live is a good investment. Liquid homeownership removes any conflict here: homebuyers are free to choose their living space and investments independently of each other.
Maintenance. Traditional homeownership entails some combination of spending your own time on home maintenance and repairs or paying for expensive ad hoc professional visits to do the same. This is both stressful and economically inefficient compared to the buying power and other economies of scale of a large property management company.
Aside from these benefits to the individual investor, widespread fractional real estate ownership would lessen the perverse political incentives described above. In the current equilibrium, homeowners tend to vehemently oppose development projects near their homes while mostly ignoring those elsewhere in the city. Owning a diffuse, non-localized stake in the city’s real estate would significantly mitigate this impulse, lessening a major obstacle to new development and improving housing affordability and abundance.
Similarly, enabling renters to gain an ownership stake in their cities’ real estate would give them an incentive to adopt a more balanced stance toward a wide variety of urban policies. Pushing for policies that favor the short-term interests of renters at the expense of the broader city’s economic growth is less appealing for a hybrid renter-owner than for a pure renter. Moreover, if renters own a fractional stake in their own apartments, they may be more conscientious about their use of the space, resulting in lower maintenance costs and higher dividends.
There are some downsides to fractional real estate ownership. Traditional homeowners necessarily have some level of insight into the value of their home – its physical condition, neighborhood characteristics, etc. – that is absent by default for owners of fractionalized real estate that they may never have seen. Without additional efforts being made to provide transparency about the real estate in question, including its ownership structure, management practices, financial modeling, and independent audits/valuations, these models run the risk of enabling negligence or fraud that harms both investors and residents. These problems are surmountable, but they cannot be ignored.
In addition to reconfiguring the raw economic incentives, more distributed property ownership would lessen the “us versus them” mentality that often infects discourse around urban housing policy. As renter-owners become more common, cities would no longer be split between renters and property owners. This new group would benefit from increasing wages and from the property appreciation that follows, presumably changing their voting habits accordingly. This recoupling of productivity and economic gains aligns incentives in a way that encourages virtuous behavior and helps restore the moral logic behind capitalism and free markets. In doing so, it would remove an obstacle that keeps American cities from realizing their full potential.
[Collection]americanaffairsjournal.org