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Today’s housing crisis didn’t just happen. It was built, layer by layer, over the past hundred years. We can point fingers at zoning, NIMBYism, or Wall Street, but this mess started long before any of that took root. If you really want to understand what broke the American housing market, start with 1925.
At the same time, banks began offering more home loans. But these weren't the 30-year fixed mortgages we know today. In the 1920s, the average mortgage required a 50 percent down payment, came with a 5-year term, and often ended with a massive balloon payment. These loans had variable interest rates, and if you couldn't pay that final sum, you lost your house.
Now think about the timeline. All those mortgages started around 1925. Five years later, the Great Depression hit. People couldn’t pay those balloon payments. Credit dried up. Banks failed. Some scholars argue this sudden mortgage implosion helped trigger the financial collapse in 1929. Even if it wasn’t the primary cause, it definitely added fuel to the fire.
But there was a catch. The FHA only backed loans in “desirable” areas, which often meant racially segregated suburbs. This practice, known as redlining, excluded many Black and immigrant families from these benefits. Public housing was also introduced but was designed to replace slums, not expand the overall housing supply. And by law, for every unit of new public housing, one dilapidated unit had to be torn down. The result was that housing production stayed flat at a time when the population needed it most.
And it worked. Homeownership in America shot up from 43 percent in the 1940s to 65 percent by the 1960s. But most of that growth was limited to white families due to discriminatory lending practices. The seeds of today’s inequities were already being planted.
By the 1970s, a quiet shift occurred. Suburban residents began opposing new development. They didn’t want apartments nearby. They didn’t want more traffic. The term “NIMBY”—Not In My Backyard—became a political force. Zoning became more restrictive, not less. Minimum lot sizes increased. Density was seen as a threat. Builders faced lawsuit after lawsuit just to get a small project approved. And all of this was happening as baby boomers came of age and needed homes of their own.
During the 2000s, banks created mortgage-backed securities out of subprime loans. These risky loans were sold like stocks. When the borrowers defaulted, the entire system collapsed. That triggered the Great Recession in 2008. Construction stopped. Millions lost their homes. And the housing supply never fully recovered.
And yet, investors keep buying up homes. In hot markets, institutional landlords outbid families. They buy single-family homes and rent them back at inflated prices. Meanwhile, wages have flatlined, and rents have skyrocketed. Over half of renters are now cost-burdened, paying more than 30 percent of their income on housing. Some pay more than 50 percent.
Want to fix the housing crisis? Start by fixing the rules that stop homes from being built. Revisit zoning. Encourage infill. Support smaller, more affordable units. And maybe stop treating every new development as a threat. Because the real threat isn’t more housing. It’s what happens when we keep doing nothing.
The Car Changed Everything
By the mid-1920s, over half of U.S. households owned a car. That changed how cities grew. Before that, homes had to be near a streetcar stop or downtown. Afterward, people could move further out. That opened up massive tracts of land for development. Suburban-style housing began to boom because land was cheap, and people wanted to escape crowded tenements.At the same time, banks began offering more home loans. But these weren't the 30-year fixed mortgages we know today. In the 1920s, the average mortgage required a 50 percent down payment, came with a 5-year term, and often ended with a massive balloon payment. These loans had variable interest rates, and if you couldn't pay that final sum, you lost your house.
Now think about the timeline. All those mortgages started around 1925. Five years later, the Great Depression hit. People couldn’t pay those balloon payments. Credit dried up. Banks failed. Some scholars argue this sudden mortgage implosion helped trigger the financial collapse in 1929. Even if it wasn’t the primary cause, it definitely added fuel to the fire.
Government Steps In, But With Strings Attached
The private market collapsed. Homebuilders stopped building. Lenders stopped lending. In response, the federal government created the FHA in the 1930s and later Fannie Mae. These agencies stabilized the market by insuring long-term mortgages. Five-year terms became 15, then 20, then 30. Suddenly, the average working American could afford to own a home.But there was a catch. The FHA only backed loans in “desirable” areas, which often meant racially segregated suburbs. This practice, known as redlining, excluded many Black and immigrant families from these benefits. Public housing was also introduced but was designed to replace slums, not expand the overall housing supply. And by law, for every unit of new public housing, one dilapidated unit had to be torn down. The result was that housing production stayed flat at a time when the population needed it most.
Then Came Levittown
After WWII, millions of GIs came home to a housing shortage. During the war and Depression, construction had all but stopped. Enter William Levitt. He mass-produced homes like Ford made cars. Entire suburbs were built overnight. Homes were small, affordable, and backed by FHA loans. Levittown homes cost about $100,000 in today’s dollars. This suburban expansion, coupled with interstate highways, created a housing explosion. Look at the graph and it’s obvious—postwar construction dwarfed anything that came before.And it worked. Homeownership in America shot up from 43 percent in the 1940s to 65 percent by the 1960s. But most of that growth was limited to white families due to discriminatory lending practices. The seeds of today’s inequities were already being planted.
Zoning and Exclusion Took Hold
In 1926, the Supreme Court upheld zoning laws in Euclid v. Ambler. By the 1950s, most cities had adopted zoning that separated residential, commercial, and industrial uses. But zoning didn’t just protect public health. It was often used to keep out lower-income residents by banning apartments, mandating large lot sizes, or requiring excessive parking. That’s how you get 3,000 square foot homes on one-acre lots and nowhere for a teacher or grocery clerk to live.By the 1970s, a quiet shift occurred. Suburban residents began opposing new development. They didn’t want apartments nearby. They didn’t want more traffic. The term “NIMBY”—Not In My Backyard—became a political force. Zoning became more restrictive, not less. Minimum lot sizes increased. Density was seen as a threat. Builders faced lawsuit after lawsuit just to get a small project approved. And all of this was happening as baby boomers came of age and needed homes of their own.
Housing Became a Financial Product
In the 1980s, something else changed. People stopped seeing homes as places to live and started treating them as investments. Home prices went up, and so did the incentives to protect those rising values. That made homeowners more resistant to change. HOAs, deed restrictions, and neighborhood opposition became tools to block development. The rise of real estate investment trusts, or REITs, brought Wall Street into the game. Housing became a commodity.During the 2000s, banks created mortgage-backed securities out of subprime loans. These risky loans were sold like stocks. When the borrowers defaulted, the entire system collapsed. That triggered the Great Recession in 2008. Construction stopped. Millions lost their homes. And the housing supply never fully recovered.
Today: Demand Is Up, But Supply Is Broken
Household formation is rising, but new housing starts haven’t kept up. Add in smaller household sizes—down from 3.5 in 1950 to 2.5 today—and the need for more units is obvious. But thanks to local opposition, outdated zoning, and the rising cost of land and labor, the country is now building fewer homes than it did in the 1960s.And yet, investors keep buying up homes. In hot markets, institutional landlords outbid families. They buy single-family homes and rent them back at inflated prices. Meanwhile, wages have flatlined, and rents have skyrocketed. Over half of renters are now cost-burdened, paying more than 30 percent of their income on housing. Some pay more than 50 percent.
So What Now?
The solution isn’t simple. But the root of the problem is clear. America didn’t run out of space. It ran out of will. We stopped building. We regulated ourselves into a corner. We let the market dictate housing without enough oversight. And we allowed a basic human need—shelter—to become an investment vehicle first and a place to live second.Want to fix the housing crisis? Start by fixing the rules that stop homes from being built. Revisit zoning. Encourage infill. Support smaller, more affordable units. And maybe stop treating every new development as a threat. Because the real threat isn’t more housing. It’s what happens when we keep doing nothing.
