Ending the FOMO and Reframing Housing Policy and the American Dream

For most of the postwar period, a family that owned a home held an asset that typically outpaced inflation. It was treated as a store of value for retirement or as an inheritance. Three institutions made this possible: tax preferences that reward leverage, local land-use rules that manufacture scarcity, and a culture that treats homeownership as a marker of prudence. When these act together, prices are pushed above what wages can follow. The well-known anxiety—the fear of missing out—is not a neurosis. It is a rational response to a game that rewards early entry and punishes delay.

One can describe the mechanism more compactly. Let the annual user cost of owning be the interest, taxes, and depreciation net of expected real capital gains. When expected gains are large, households tolerate high prices and low rental yields. When expected gains fall to roughly the rate of inflation, ownership becomes financially close to renting, apart from tenure security and insurance against rent shocks. This is the incompatibility at the heart of the matter: prices cannot both grant owners a steady real windfall and remain accessible to new entrants.

Moderate Reforms, Not Heroics

It is tempting to wish for a cleansing collapse that resets prices to the levels of a decade or two ago. That is not policy; it is a plan for a financial crisis. A sharp fall in prices would produce negative equity for recent buyers, damage the balance sheets of lenders and pension funds holding mortgage-backed assets, and cut municipal revenues that rely on property taxes. The cure would be worse than the disease. Affordability will not be restored by catastrophe but by duller means: increasing supply and removing incentives that inflate demand. The correction, if it comes, will be a flattening rather than a fall.

Wealth Creation in Advance or in Lieu of Homeownership

To neutralize the tenure bias without inflating prices, the tax system should treat shelter as a consumption good while creating a disciplined channel for long-horizon saving outside housing. Two changes suffice.

First, create a capped, refundable renter’s credit anchored to local medians for rent. Allow renters to claim a federal credit up to the median rent of their metropolitan area (or county in rural regions). A refundable credit reaches low- and middle-income households that do not itemize and avoids the regressivity of a deduction. The cap on the refund at the median rent prevents subsidization of luxury units and limits landlord capture in tight markets.

Second, establish a Down-Payment Savings Account (DPSA) with hard caps and narrow investment menus. Contributions grow tax-deferred; withdrawals are tax-free if used for an owner-occupied down payment by a first-time buyer. Annual and lifetime caps are tied to a fraction of the regional median down payment to avoid fueling high-end demand. Qualifying investments are limited to broad, low-cost index funds to minimize speculation. For realistic expectations, note that diversified equities have delivered roughly 6–7% real returns over long horizons with substantial volatility.

By default the renter’s credit will be put into the DPSA with annual opt-out. By default, the refundable credit is swept into the DPSA unless the household opts out at filing. This “save-the-refund” design converts an annual transfer into durable asset accumulation without mandates or large fiscal outlays. The default renter’s credit stop once the DPSA reaches the median downpayment of the area.

People can put in up to 10% of a median down payment per year until the DPSA reaches the median down payment. The DPSA can continue to grow after reaching median down payment. So if an area has a median home price of $1,000,000, then the down payment is $200,000. They can put in $20,000 each year, but they can put away $1000 a month, or $12,000 a year. If the median rent in the area is $2000 per month and the tax rate is 15%, they get a tax credit of $3,600. If the DPSA returns 10%, then at the end of the first year they have contirbuted $12,000, received $3,600 in the tax credit and get $1,560 in returns, resulting in $17,600. By year 10, they would be maxing out the DPSA contributions. Even if the person isn’t actively saving and just using the tax credit, after 10 years, the savings would be appraoching $60,000 in 10 years and in 20 years it would be approaching maxing out the DPSA.

Not everyone will opt into using the DPSA for a house. While the money can’t be withdrawn without significant penalities similar to early withdrawl penalties on 401k accounts, this money should be able to be used after it is no longer feasible. Unused balances at age 60 may be rolled into a Roth IRA paying half the long term capital gains rate or penalty-free at age 70.

Additional Demand-Side Changes (Surgical, Not Sweeping)

Retain principal-residence relief for ordinary households, but narrow the pathways that convert housing into a serial tax-advantaged trade. Three targeted steps are sufficient.

Eliminate mortgage-interest deductibility on second homes. Interest on a primary residence remains deductible (subject to existing caps), but interest on second homes is no longer subsidized. This removes an artificial boost to discretionary demand without touching the average owner-occupier.

Tighten and phase down the §121 exclusion for serial use. Preserve the standard exclusion for long-hold principal residences, but reduce benefits for very short holding periods and for repeated use within, say, a six-year window. Add a partial clawback when a seller repurchases within twelve months, to discourage tax-arbitrage “flips.”

Impose narrow anti-flip frictions in tight markets. In metros with persistent shortages, add a modest transfer-tax surcharge on resales within three years and require higher down payments or lower loan-to-value ratios for investor loans. These frictions are small in normal tenure transitions but material for purely speculative churn.

None of these measures confiscates accrued gains. They simply reduce demand-side amplification that makes housing behave like a growth stock while leaving ordinary ownership intact.

Supply-Side Changes

Because the speculative premium is produced by tax asymmetry and manufactured scarcity, reforms must compress both: damp the artificial demand and increase by-right supply. In addition to tax-code adjustments, it is necessary to make it easier to build because there has been a long term imbalance in supply and demand in housing. Upzoning by right in job-rich and transit-served areas, broad legalization of accessory dwelling units with standardized approvals, and a shift of authority from neighborhood vetoes to state or regional frameworks would convert manufactured scarcity into ordinary competition. None of this is novel, and none of it is glamorous. It is the work required if we truly want prices to track costs rather than expectations.

Even an ambitious building program does not erase the past. Land is scarce where wages are high, construction has a replacement-cost floor, and booms raise input prices for labor and materials. New supply mainly flattens future appreciation and stabilizes rents. It does not rewind decades of accumulated paper gains. While this may not satisfy some who want retributive fiscal justice, such a desire is out of step with American history and movements that seek this are doomed to perpetual losses politically.

A Cultural Correction: What the American Dream Must Give Up

Policy can restrain incentives, but culture supplies the demand. As long as households are taught to treat a primary residence as their main speculative asset, the system will recreate the same pressures after every reform. Renting should be regarded as a stable and respectable tenure, not as a sign of failure. Countries with lower homeownership rates and stronger tenant protections demonstrate that ordinary families can build wealth through diversified financial savings while consuming housing as a service. The point is not to copy their institutions slavishly but to separate the question of shelter from the question of investment. A society that confuses the two gets both badly.

If the American Dream requires that homes deliver gains above inflation, then each generation must buy from the last at ever-higher real prices. That cannot be squared with broad affordability. A more durable ideal is plainer: secure access to decent housing—owned or rented—paired with long-horizon wealth building outside one’s walls. To move in that direction, we should make the tax code less biased toward leverage, allow disciplined saving for down payments without stoking luxury demand, legalize more housing where people work, and stop treating anxiety about “missing out” as a private failing rather than a predictable consequence of public choices.

Nothing in this program promises instant relief, and nothing here flatters the notion that we can keep the gains while broadening access. The purpose of policy is not to vindicate yesterday’s bets but to make tomorrow’s choices less perverse. Housing should be shelter first and an asset only incidentally. If we can accept that, prices will grow closer to costs, rents will be less volatile, and the fear that so often drives the market will give way to something less dramatic and more useful: indifference.