Residential real estate industry - Business in United States of America
Definition: Enterprises engaged in construction, sales, and financing of residences, including single-family homes, multiple-occupancy units, and manufactured homes
Significance: Twenty-first century housing costs account for 30-50 percent of the typical American family budget, making housing the largest sector in the nation’s consumer economy. Housing prices and availability strongly influence labor’s costs to industry. Historically, both peaks and troughs in the housing market have created ripple effects influencing all aspects of the economy.
The modern residential real estate business in the United States rests on three legs: the contractor developer, who oversees the planning and construction of multiple dwelling units; the realtor, who markets new and existing units to American families; and the lending industry, which provides capital both to the contractor-developer and to the home buyer. None of these entities operated to any significant extent before the U.S. Civil War. In colonial America and during the early decades of the republic, housing development was constrained by a general lack of capital and transportation systems, requiring most people to live within walking distance of work. In contrast to the situation in Europe, land and raw materials in the New World were cheap, so most free settlers lived in owner-occupied homes, ranging from the log cabin—for which the owner supplied all the labor and materials—through a simple frame house, to infrequent larger homes requiring much skilled craftsmanship and imported materials to complete. Even for these, the owner usually served as contractor.
The population was overwhelmingly rural— 95 percent in 1790, 89 percent in 1840. In urban areas, combining the owner’s residence with a store or workshop blurred the distinction between business and residential real estate. Real estate sales and loans associated with them were handled as a sideline by firms whose main source of income lay elsewhere—in the earliest days, with the maritime shipping industry, later with railroads.
The influx of large numbers of European immigrants during the 1840’s created an urban housing crisis, especially in New York and Boston. Core areas became increasingly densely packed and squalid, while dependence on foot travel for transportation limited peripheral expansion. Owners of rural property on the outskirts of large cities found it more profitable to sell lots dedicated to middleclass, single-family housing than to allow a mixture of manufacturing and substandard shantytowns to grow up spontaneously in these borderlands.
Llewellyn Park, New Jersey, the first planned development in America, offered a park like setting with all the trappings of a luxurious country estate, shared in common by upper-middle-class residents. Purchasers of lots agreed to multiple conditions ensuring uniform upscale development and became members of a self-governing homeowners’ association. Although Llewellyn Park and other similar “Garden City” developments (Chestnut Hill, Pennsylvania; Garden City, New York) drew on contemporary utopian visions of ideal communities, they were decidedly business ventures catering to the dreams and aspirations of the well-to-do. A key feature of the Garden City was a ferry terminal or commuter rail station enabling businesspeople and professionals to commute to their jobs in the city.
Marketing single-family homes, built and furnished in a style beyond the means of the average working-class family, as the centerpiece of the American Dream dates from the middle of the nineteenth century. Andrew Jackson Downing’s Cottage Residences (1841) and Catherine Beecher’s The American Woman’s Home (1869) equated domestic comfort with Christian virtue. Beecher (sister of Harriet Beecher Stowe, author of Uncle Tom’s Cabin) referred to the idealized suburban home as “the home church of Jesus Christ.” Neither Downing nor Beecher participated directly in real estate marketing, but their popular books set the tone for later promotional literature that elevated home ownership to the level of a patriotic and religious duty.
Streetcar Suburbs, 1880-1934
Urban development in the last quarter of the nineteenth century took advantage of improved local transportation and large amounts of capital generated by railroads. Streetcar suburbs attracted lower middle-class and skilled working-class families, and included a high proportion of rentals. The master developer bought farmland, subdivided it, and sold lots in small batches to entrepreneurs, who in turn contracted with builders. Standardized designs and materials reduced the need for skilled labor and brought down overall costs.
In Chicago, Samuel Eberley Gross, who billed his operations as the largest real estate business in the world, pioneered the comprehensive real estate development, acquiring land, creating the infrastructure, subdividing, financing the construction of thousands of standardized houses, and carrying mortgages for working-class families. Massive high pressure sales campaigns attracted unsophisticated buyers. Riverside and Grossdale, the largest developments, proved of mixed benefit. Families attracted by the Why Pay Rent campaign and by illustrated brochures touting homeownership as the key to the American Dream discovered that ownership carried many unexpected costs.
During the Panic of 1893 and the subsequent depression, many homeowners experienced foreclosure, a phenomenon that became increasingly prevalent in the next century, as mortgages came to be the standard method of financing houses. Between 1900 and 1920, home ownership remained flat at about 46 percent of American families, while the percentage of homeowners having mortgages rose from 27 to 38 percent and aggregate mortgage debt rose six fold, to $6 billion.
Boom and Bust
Real estate sales as a distinct profession emerged in the United States during the 1890’s. Responding to a public perception that real estate and mortgage brokers were swindlers, brokers in major cities formed professional associations, membership in which guaranteed a buyer adherence to a code of ethics. Realtor associations regulated commissions, enforced exclusivity contracts, and provided local multiple listings that during the 1920’s had evolved into a nationwide network. Lobbying efforts by the National Association of Realtors played a major role in shaping the housing legislation of the New Deal era so as to favor suburban sprawl.
During the economic downturn immediately following World War I, the National Association of Realtors launched a massive campaign touting home ownership as a patriotic duty. At the same time, Henry Ford’s Model T (also known as the Tin Lizzie) made the average American much more mobile. The dream home of the 1920’s was a Sears, Roebuck bungalow, assembled from precut, standardized components on a generous lot well outside the central city. Sears sold roughly seventy thousand houses mail order between 1908 and 1940. Local building supply houses sold many times that number. Savings and loan associations provided financing; however, most mortgages involved balloon payments and thus carried a high risk of default. Rapidly rising land prices led to much speculation.
The real estate market began to sour in 1926, beginning with the collapse of a housing bubble in Florida, and was already in serious trouble when the stock market crashed in 1929. By 1932, new housing starts had nearly ceased and communities were devastated by massive foreclosures. Congress responded with the National Housing Act of 1934, which established the Federal Housing Administration (FHA). Heavily influenced by the real estate industry, the act gave first priority to reviving the market for single-family homes and encouraging new construction.
The key to the FHA program was (and still is) mortgage insurance. The FHA establishes guidelines for buyer creditworthiness and property value, and collects an annual insurance premium from the buyer. In return, the lender is guaranteed a full return on its investment if the buyer defaults. The 1934 act also established a system of National Home Loan Banks, operating as cooperatives, to loan mortgage money to local banks and thrift institutions. This system worked remarkably well. By 1936, housing starts had nearly regained their 1925 level. FHA-backed mortgages and veterans’ benefits underwrote explosive expansion of suburbia immediately following World War II.
During the 1980’s, average home prices in the same markets (Florida and California) that experienced the bubble of the 1920’s reached levels the FHA would no longer insure. Lenders, counting on continued rapid escalation in property values, responded by issuing riskier and more costly mortgages and selling bundled mortgages to investors. Freed from the constraints imposed by the FHA, real estate markets in many parts of the country underwent exponential growth.
That growth came to an abrupt halt in 2007 with a wave of defaults and foreclosures and an investment community no longer willing to fund risky mortgages. As of mid-2008, the results of the meltdown of the subprime mortgage industry had spread to include a general tightening of consumer credit, rising unemployment, a fall in the stock market, and failure of a number of large financial institutions heavily invested in mortgages. Congress responded with the Foreclosure Prevention Act of 2008, which included, among other provisions, major changes to the hitherto successful FHA program.
Although a majority (68.9 percent) of American households live in owner-occupied units—including single-family site-built homes, manufactured homes, and condominiums— a substantial minority are renters. The percentage of rental households stood at 53.5 in 1900, remained relatively constant until 1940, dropped below 40 percent by 1960 during the post-World War II building boom, and has declined slowly since.
From a market point-of-view, rental housing provides the investor with return both in rents and in property appreciation. For several decades, market conditions in most areas have not favored constructing new units for low- and moderate-income tenants. Increasingly, the most desirable apartments in core city areas are being renovated and sold as condominiums to urban professionals. New multiple- unit construction in suburbia also favors condominiums over rentals.
The U.S. Department of Housing and Urban Development (HUD), created in 1965, has attempted through subsidies and tax incentives to improve the stock and quality of rental housing in cities. The business of housing low-income renters has become dependent on these subsidies and is increasingly handled through state and local government and through nonprofits. There have been many scandals involving corporate diversion of HUD funds into development projects unconnected with the core mission of providing safe affordable housing to the urban poor.
Mobile and Manufactured Homes
Virtually unknown before World War II, mobile and manufactured homes have since become a fixture of the American housing market. During and immediately after World War II, a basic eight-by twenty- foot sleeping unit on wheels, without plumbing, served as temporary housing for defense workers and returning veterans. During the 1950’s, this evolved into a boxy twelve-by-forty-foot dwelling with kitchen and bath, technically mobile but usually permanently installed in a park or on rural land. In 1976, when such dwellings were first included in national housing legislation, the term “manufactured home” replaced “mobile home.”
During the early twenty-first century, Americans lived in 8.8 million manufactured homes, 8 percent of the nation’s total housing units. These were concentrated in rural and low-income areas. The market for manufactured homes and the laws pertaining to them are a curious hybrid between real estate and motor vehicles. Older units indeed had many of the characteristics of motor vehicles, notably rapid depreciation that deprived this nominal form of home ownership of much of its long-term value. Newer manufactured homes, especially when installed on a foundation on land the buyer owns, differ rather little from lower-end site-built homes and retain their value if meticulously maintained. FHA backed financing is available for manufactured homes. They are an important source of affordable housing, particularly in the South.
In many areas, land occupied by rental trailer parks came under pressure to be used for more lucrative developments. A tendency of local planners to welcome eradication of something regarded as an eyesore was tempered by growing recognition of the vital role manufactured-home parks play in housing lower-income workers and elderly people on limited fixed incomes.
Duany, Andres, Elizabeth Plater, and Jeff Speck. Suburban Nation: The Rise of Sprawl and the Decline of the American Dream. New York: North Point Press, 2000. Contrasts the contrived development of suburbia with evolution of a village; critical of role of the FHA.
Fletcher, June. House Poor: Pumped-Up Prices, Rising Rates, and Mortgages on Steroids. New York: Collins, 2005. Principally concerned with runaway development in the preceding decade, declining affordability, and the shaky creative financing that fueled these trends.
Hayden, Dolores. Building Suburbia: Green Fields and Urban Growth, 1820-2000. New York: Pantheon Books, 2003. Thorough and well-documented account of real estate development including social and financial aspects; good coverage of the period before World War II.
Hornstein, Jeffrey M. A Nation of Realtors: A Cultural History of the Twentieth Century American Middle Class. Durham, N.C.: Duke University Press, 2005. Emphasizes the interaction between the real estate industry and the American political system. sociological in approach.
Wright, Russell O. Chronology of Housing in the United States. Jefferson, N.C.: McFarland, 2007. This time-wise look at American housing, from the arrival of the settlers to the twenty-first century, examines the transition from rural to urban life and issues such as sanitation, defense, and water supplies.
See also: Land laws; Commercial real estate industry.