The real estate boom is bad for America. It’s bad for out economy, and it’s bad for our souls.

For many people, especially those living in major cities and their suburbs, real estate has become an obsession, a cause for panic. Those who don’t own houses are desperate to buy them, so desperate that they will go dangerously deep into debt and otherwise screw up their lives for fear that the train is leaving the station without them. Those who do own houses have watched them appreciate so quickly and effortlessly that they feel almost compelled to drink even more deeply of the intoxicating waters of real estate. Both of these groups have real estate so much on the mind that in a city like Washington an evening’s conversation with friends is almost bound to turn, sooner or later, to wild Las Vegas-style get-rich-quick schemes.

And there’s another group of people—a large group, growing every day who would have been able to buy houses a generation ago but won’t be able to now, because housing prices have risen so much faster than personal incomes. If the single-family home is, as widely believed, the bedrock of our democracy, then the decline in home ownership is a dangerous sign.

Within both groups, the housing craze has turned happy and productive people into nervous wrecks. People making, say, the princely salary of $35,000 a year are consumed with money worries and think about quitting jobs they love, to make more. It’s sad to see this happen; and it just doesn’t happen in cities where a pleasant house can still be purchased for a price in the five figures.

Next to the rising price of fuel, the real estate boom has been the most important force behind the inflation of the 1970s. Inflation, of course, makes the real estate market hotter and hotter, thus draining the pool of available capital away from investments that could produce innovation, jobs, and economic growth and reduce inflation. In a real estate boom town, you’d have to be nuts to put a spare $5,000 into some eccentric genius’s garage invention—that money would go into a condominium instead.

Weedy Lots

“The real estate boom” is really too broad a term, in that it encompasses both productive and non-productive investments. Any boom in new construction is good for the economy; if you put a thousand dollars into one share of a new shopping mall in the suburbs, your money helps to employ construction workers and craftsmen and, ultimately, to start new businesses. The part of the boom that’s unproductive involves the fast trading upward of property (both built-on property and raw land) without anything being done to the property. If you put that thousand dollars into a real estate syndicate that owns a weedy vacant lot on the edge of town, and the syndicate resells the lot for a profit a year later, your thousand dollars has produced nothing of benefit to society. Especially with a recession under way, we ought to be desperately looking for ways to put our capital to positive use—in research and development, new plants and equipment, and new construction. We need to get it out of weedy lots.

Some of the reasons for the real estate boom are immutable. When the baby-boom generation arrived at house-buying age, it obviously created a seller’s market. Sustained inflation has had a similar effect, because it exaggerates the advantages of going into debt, and the classic debt-financed purchase is real estate. These forces are difficult to control. There are, however, several simple and easily reversible ways in which people are currently being encouraged to put as much money as possible into real estate. For example:

•All interest payments on the mortgage of a residence are deductible from personal income for tax purposes. This is the main tax advantage of owning rather than renting your residence, and also the main subsidy to the middle class (or rather, lately, the upper middle class) in the tax laws. Its rationale is to encourage home ownership, because that is thought to lead to social stability and a sense of security and pride on the part of the homeowner.

• The home mortgage interest deduction is a particularly dramatic help at tax time because of the way mortgage payments are computed. If you hold the standard 30-year mortgage, you’ll spend the early years of the mortgage paying a lot of interest and very little principal, and the later years paying mostly principal. The reason for this method of payment is that it gives home-owners their big tax break early, when they probably need it most. But it also means that the home mortgage interest deduction’s tax relief withers away with passing years, thus giving the home-owner a considerable incentive to sell, buy a new house, and start afresh with a new mortgage and big tax deductions.

•That reselling process is made easier by a provision in the tax code that exempts from taxation the profit from the sale of a residence as long as that profit is immediately plowed back into the purchase of a new residence. Obviously this is supposed to protect people from forced downward mobility. For example, if you bought a house for $30,000 in 1965 and you have to move to another town, and you sell the house for $100,000, then presumably it will take that full $100,000 to buy the exact same sized house elsewhere; if the government taxed your profit you’d be forced to buy a smaller house.

• More generally, capital gains profits from the sale of something at a higher price than what you paid for it—are taxed at a lower rate than regular earned income. The major justification for the lower rate is to encourage investment, particularly in risky enterprises. But the capital gains provisions don’t exclude capital gains on real estate; so if you buy a condominium and resell it two years later for a profit, the money you put into it hasn’t helped anyone but you, and you still get the lower capital gains tax rate on your profit.

• Finally, property is taxed by local governments on the basis of its assessed value, which includes the value of the land and the value of what’s on it. Property taxes on unimproved property are relatively low; this creates an incentive to hold on to that property in hopes of reselling it at a profit, rather than building on it, which would increase the assessment.

Mutant Monopoly

Most people who are concerned about the real estate boom see it as a problem of too-high prices that result in people not being able to afford housing. In the hottest of the boom areas like Washington and Los Angeles cries are going up for strict rent control, limits on condominium conversion, and anti-speculator laws. The trouble with these solutions is that they lead landlords to quit keeping up their rental properties, and to stop building new ones. Instead, they’ll put their money into existing single-family housing (which is almost always exempt from rent control) where it won’t do a bit of good.

It’s more useful to look at the real estate boom as a problem created by the shortage of an extremely valuable commodity housing that results in prices for the commodity being bid sky-high and capital being swallowed up in it without necessarily producing anything useful. We need to encourage the kind of useful capital expenditure that creates more housing, while discouraging the investments that do nothing to help ease the shortage. We need to take away the breaks given to people who are tying up their money in the purchase of property on which they intend to speculate rather than build.

The best way to get at those people is to shave away their capital gains break, so that the profits realized on the sale of any piece of property will qualify for tax reductions only to the extent that the property has been improved. If you put up a subdivision on your vacant lot, you would get a big tax break; if you just resell the lot, you would get taxed heavily. Further heat could be applied to land traders by raising the property taxes on undeveloped land in metropolitan areas so high that the pressure to build on it becomes irresistible.

I’m not saying that wherever lovely green space exists, tract homes should be built. If local governments want to create parks, they should buy up land and do so; deciding what land to leave open is a major part of their responsibility to the public. But vacant lots and boarded-up houses do not constitute lovely green space. They’re just space being wasted, space that ought to be built on.

In the case of individual homeowners, we should be more gentle, because home ownership ought not to be discouraged. But tax breaks like the home mortgage interest deduction could be directed to those individuals who purchase or build new housing or rehabilitate abandoned housing rather than those who simply buy existing housing. Other changes would discourage the average citizen with a few thousand dollars to spare from tying it up in a bigger house than he needs. If, for instance, the interest proportion of mortgage payments were averaged out over the life of the mortgage, people would have an incentive to hang on to their houses rather than reselling after a few years. If the tax break given to plowing the profits on one house into the purchase of another house were also given to the plowing of those profits into shares in a new business, people who move might not always buy the most expensive house they can possibly afford.

Until then, the real estate boom will continue to have effects very different from the effects a healthy capitalist economy is supposed to have: it will reward the owners of real estate while creating a stagnant society. The house-buying game, as it is played today in cities like Washington, is an evil mutation of “Monopoly,” a version that might as well have been designed by some cynic determined to teach children the dangers of free enterprise: for all the frenetic concern with investment and return, very little seems to be produced.

Nicholas Lemann

Nicholas Lemann is a professor at Columbia Journalism School and a staff writer for The New Yorker. His most recent book is Transaction Man.