(FORTUNE Magazine) – WHEN WERE YOU LAST at a dinner party where someone didn't raise at least one of these perennially favorite topics: (1) how that $47,500 subdivision split- level, bought in 1973, is now worth a cool quarter million; (2) how married children, all with good jobs, cannot scrape together a down payment for even the draftiest bungalow in the town where they grew up or work; (3) how if the government doesn't quickly resume building subsidized housing, the ranks of the homeless will swell beyond imagining? Decent housing for all and widespread homeownership are major pieces of the American dream. But for many it looks like a dream perpetually deferred. The percentage of families who own their dwellings, which rose steadily for 40 years to a peak of 65.6% in 1980, slipped to 63.8% last year. That seemingly small decline means two million fewer homeowners. More than six million low- income households -- nearly 50% of all people below the poverty line -- spend over half of their incomes for rent. William C. Apgar Jr., director of the Joint Center for Housing Studies at Harvard, expresses a widely held view when he says, ''America is being transformed into a nation of housing haves and have-nots.'' Most who worry about the trends assume that huge increases in federal spending are the answer. A dispassionate look leads to other conclusions. First, there is a problem, not a crisis. Second, pouring more money into new subsidized housing won't help. What's required are federal and local policy changes that will allow the housing marketplace to work, along with carefully focused spending on the poor. The challenge presents Jack Kemp, the new Secretary of Housing and Urban Development, with a custom-built opportunity to test his free-market principles. HOW MANY have-nots have we? Nobody can say for sure. Among aspiring first- time home buyers, young families in the 25 to 29 age group have been the hardest hit. The proportion who own homes has tumbled from 44% a decade ago to just over 36% today (see chart, page 86). Part of the reason -- but only part -- is that housing is now more expensive. The median-priced American home fetches $91,000 -- and in parts of the Northeast and California, the median is getting close to $200,000. Costly residential real estate is to some degree a hangover of the late + 1970s when the tornado of double-digit inflation lifted house prices clear into Oz. But the same winds also puffed up homeownership. Because mortgage rates were lagging behind inflation and house prices were rising 14.5% a year on average, smart young families saw a home as an unbeatable investment. Today, except in the tightest housing markets, prices are rising only about with inflation, and recent softening in some areas has raised fears of an actual decline in prices. Meantime, mortgage costs are higher, and lower income-tax rates have made interest deductions less important. Changing lifestyles have also reduced demand. Many people are postponing marriage -- or abandoning the institution. Focus on the married couples who comprise the bulk of first-time buyers and you discover that ownership rates remain about where they were a decade ago. Still, from anecdotal evidence alone, plenty of young people who want to buy simply can't. Some do not earn enough to carry mortgages, and their numbers have doubtless increased with recent interest rate hikes. A bigger obstacle, in the view of most experts, is that this generation of low savers cannot make the down payments. The poor have a much worse problem in finding shelter, and their needs have outstripped federal assistance programs. Housing benefits, unlike Medicaid and food stamps, are distributed on a first-come, first-served basis to the limit of HUD's annual appropriation. This year its $12.4 billion housing assistance budget will reach just 28% of all who qualify. Some 7.7 million families fall through the cracks today, vs. six million in 1974. It's not for want of trying. Since the mid-Sixties the U.S. has spent about a quarter of a trillion dollars to build or subsidize the construction of over four million low-income housing units. Government has not just failed to solve the housing problem: It has worsened it. Peter D. Salins, a professor of urban studies at New York's Hunter College, explains how. For all the money lavished upon it, government-built housing still accounts for a small proportion of the poor's shelter. Worse, it is outrageously expensive, inhospitable, and badly located. The money would go much further and yield more desirable housing, Salins argues, if it made the poor more like other consumers, able to pursue their desires in the marketplace. Zoning restrictions wreak further damage. Even as they clamor for more federal money to make housing affordable, local governments zone out the poor -- and the not-so-poor. Breaking the impasse has to start with meeting the needs of new home buyers. A healthy housing market relies on a concept that economists call ''filtering.'' As new homes are built, more prosperous renters move up the housing ladder toward ownership. Their former apartments are freed up for less affluent tenants. Through a chain of such moves younger and poorer households are able to find acceptable apartments. But because so many young families aren't able to buy, the filtering process has broken down. Phillip L. Clay, an urban studies professor at MIT, estimates that middle-class renters now occupy some 20% of what was once lower-income housing in many tight urban markets. Diddling with mortgage financing mechanisms to boost first-time buyers over the down payment hurdle offers only marginal help. The Federal Housing Administration's lending standards are already liberal, and loosening them further would merely risk more defaults. Allowing first-time home buyers to tap their tax-free IRA accounts might give some an extra push, but few young families have much in those accounts. A recent initiative in Michigan could turn into an open-ended drain on state funds. Governor James J. Blanchard wants to sell aspiring first-time buyers tax-exempt state bonds that would eventually cover their down payments. But if house prices rise faster than Michigan expects, the plan requires the state to make good the difference between the home buyers' savings and the amount they need.

Some buyers are making the nut by so-called equity sharing. In exchange for cash up front, a lender stakes a claim on the home's future appreciation -- typically 50%. But such deals make sense only in markets where appreciation is all but guaranteed. Elsewhere lenders find the proposition too risky. Kenneth T. Rosen, chairman of the Center for Real Estate at Berkeley, California, would spread the risk by having the FHA or the Federal Home Loan Bank Board, which oversees the nation's savings and loan institutions, establish a national shared-equity fund. Should home prices tumble in one part of the country, the fund would be cushioned by the gains it reaps in regions where markets remain tight. Rosen's idea deserves a serious look. Meanwhile, many young home buyers continue to get down-payment help from those friendly bankers of last resort, mom and pop. The National Association of Realtors calculates that about a third of first-time buyers depend on family assistance to supplement their . savings. Mom and pop are often in great shape to oblige. Ownership rates among the old continue to climb, and home equity loans make it easy to borrow against that built-up wealth. The best solution to America's housing affordability problem would be to lower the cost of building homes. Filtering works best when the cost of developing new housing declines. So who is clogging the filter? Don't blame developers. ''The first-time buyer is a builder's bread-and- butter business,'' says John Phillips, a homebuilder in Olympia, Washington. ''There is a steady flow of new customers as households are formed, and new families are likelier to buy when the economy is weak.'' Homebuilders have made impressive cost-saving gains. Since 1980 the inflation-adjusted cost of construction has fallen 6%. Further improvements are within reach as the industry shifts from on-site ''stick built'' homes to factory-made modular units. Paul F. Kando, a highly regarded advocate for factory-built housing who directs the Center for the House in Washington, calculates that today's manufacturing methods can reduce the average cost of building a spacious 1,865-square-foot home 27% to $61,142. Such savings would reduce the annual income a buyer in Pennsylvania, for example, needs to qualify for a mortgage by $6,760. If developers can build affordable housing and want to, what's stopping them? The chief villain is a web of local zoning and land-use regulations, which codify communities' determination not to have it. Originally intended to impose sensible order on growth, many ordinances now serve as barriers to all but the costliest new housing. Some are outright capricious. In Phoenix, for example, city fathers insist that most new homes be built with Spanish tile roofs instead of cheaper asphalt shingling. This harmonizing touch adds up to $6,000 to the price new home buyers must pay. Strict limits on density do the most damage. As communities braced themselves against an onslaught of growth, they stuck fast to -- or tightened -- zoning regulations that determine how many houses can be built on how much land. Because raw land costs are the fastest-growing component of new home construction, the only way to reduce the cost of building suburban housing is to increase the number of homes that can be built on a site. But pity the developer who tries to wheedle a density bonus out of a local planning board. Haggling with officials can easily consume two or three years, while the % developer keeps his money tied up in the gestating project. THE AGONY DOESN'T end until the project's neighbors have been heard from, and they would rather live next to empty lots. ''Angry neighbors have become the fourth branch of government,'' says Douglas R. Porter, director of development policy research at the Washington-based Urban Land Institute, a planning group. Hovnanian Enterprises, a New Jersey-based builder of over 2,300 starter homes each year throughout the Northeast (including those in the picture on page 84), estimates that zoning battles and lawsuits tie up construction starts an average of four years. Hovnanian employs 16 full-time lawyers to guide projects through the regulatory maze and to battle irate neighbors. Easing standards can yield dramatic savings. Portland, Oregon, for example, speeded up its approval process, reduced its infrastructure requirements, and allowed builder Mike Robinson to boost the density of his North Meadow Village development from four homes per acre to nearly ten. The variances helped Robinson chop an average $15,647 out of the price of each of 58 single-family homes and sell them for $50,000 to $55,000. HUD and the National Association of Homebuilders undertook an experimental program in 29 other cities during the mid-1980s, using the most advanced construction techniques and cutting regulatory barriers. It produced savings averaging 15%. But a new obstacle to affordability known as the impact fee has reared its head. Since local property owners still want schools and sewers but are unwilling to tax themselves, local governments make developers pay. An outgrowth of the late-1970s property taxpayers' revolt, impact fees often choke off the building of starter homes. Communities in 31 states now levy them, and in many they have become monstrous, bankrolling items on local wish lists such as parks and swimming pools. In Los Angeles County, the charges have ballooned from $3,000 to $22,000 per new home over the past decade. Why don't developers resist? Far easier for them to get quicker approval for fewer, more expensive homes, whose buyers can more readily be stuck with the costs. Says developer Phillips: ''You have the same fixed overhead whether you build a $50,000 home or a $300,000 one, but it makes up a far smaller proportion of the selling price of the expensive home.'' Throughout the U.S., says George Sternlieb, an economist at Rutgers, impact fees, zoning restrictions, and regulatory delays add 20% to 25% to the selling price. Breaking the regulatory logjam will require states to curb local boards. So far only a few have tried, though several more are discussing proposals. New Jersey has come up with the most promising approach. A series of state supreme court decisions known as the Mount Laurel cases, which culminated in 1986, established that access to housing is a constitutional right for the state's residents and banned exclusionary zoning. The townships can still plan their growth, but the plans must make room for housing that residents earning below $18,000, 80% of the state's median income, can afford.

A statewide body called the Council on Affordable Housing, made up of public officials, residents, and a developer, certifies new local standards and arbitrates disputes. Since the system was introduced, most of New Jersey's fastest-growing communities have gotten certification. Douglas V. Opalski, the council's executive director, thinks the procedures have helped cut approval times to under a year and will spur most of the 145,000 units of affordable housing the state needs by 1993. Though such measures will do a lot to unclog the filter, they will not by themselves get the poor housed. What to do? Let's start with what not to do. Building more subsidized housing is the standard solution, but using scarce federal funds for that purpose helps too few needy families. The Office of Management and Budget estimates that each new unit costs $70,000. To build the 250,000 units HUD financed yearly in the late-1970s would cost $17.5 billion -- nearly half again HUD's present outlays -- and barely dent demand. The harshest indictment of federal construction spending is that much of it perpetuates the inner-city cycle of decay and welfare dependency. ''The projects were intended to shore up declining neighborhoods,'' says Robert L. Woodson, who heads a conservative poverty research group in Washington called the National Center for Neighborhood Enterprise. ''Instead they have turned into social dumping grounds and have isolated residents in pockets of poverty far from the jobs that would help them escape.'' If the Feds aren't to build new low-income housing, who will? A congressional commission last year estimated that 17 million families will need help by 2003, vs. about 13 million today. But, the group estimates, the number of subsidized and private-market apartments will fall from about 12 million to just under nine million. The commission has overstated the problem. Its projected 2% annual growth in the number of impoverished families is extrapolated from a base year of 1982, the trough of a recession. It also made no allowance for any increase in the supply of affordable, unsubsidized private rental housing -- which provides three-quarters of the poor's shelter. ANOTHER WORRY is that some of the poor's existing housing could be wrested from them in coming years. About half of all subsidized housing since the 1960s was built by private developers enticed by FHA-guaranteed, low-interest mortgages and rent subsidies. In exchange, the developers agreed that their projects would serve low-income occupants for 20 years. Those obligations are now beginning to expire. According to the commission, 523,000 subsidized apartments could fall out of the stock over the next 14 years as owners of some buildings convert to market-rate housing and others default. Here again, the estimates are too high. Conversion is risky -- the market may head south before the rehab is done -- and the foreclosed units won't just disappear, since HUD will auction them off to new buyers. HUD projects the loss will not exceed 150,000 units. Though vast, the remaining shortfall is beginning to yield to the efforts of hardy, private, nonprofit developers, supported largely by local businesses. Any federal program should aim to augment their efforts. One such organization, Bridge Housing Corp., has put up 16 affordable- housing developments in the no-growth environment of greater San Francisco. Launched in a sublet office with a three-person staff in 1983, Bridge would rank as one of the nation's 100 largest homebuilders if it were a profit-making enterprise. Unlike older nonprofit housing development organizations born in an era of federal largess, Bridge structured itself as if it were a for-profit developer. Says President I. Donald Terner, formerly California's state housing director: ''We knew we couldn't count on getting any federal money. We would have to wear suits and ties to the office, not Birkenstocks.'' Bridge differs from for-profit developers in just two respects, not including Terner's nostalgia for sturdy sandals. First, it reserves 40% of its units for families with annual incomes no higher than $25,000 -- 80% of the area median. The remainder go to families with incomes of $25,000 to $40,000, at market rates. Secondly, Bridge uses any profits from the market-rate units to reduce the cost or expand the number of units for lower-income residents. To win over planning boards and neighbors, Bridge invests heavily in attractive architectural designs that blend with the surrounding community. In return it asks for relief from impact fees, along with zoning density bonuses that allow it to build up to 25% more units on a site. Having a for-profit partner helps: Bridge has worked with 11 Bay Area developers. ''It stiffens the spines of local officials who have to stand up to angry neighbors,'' Terner says. ''Bridge waves the flag of public purpose, and our partner offers a reassuring combination of financial depth and development experience.'' Started with $5 million in grants from a local business group, Bridge has built or has under way more than 3,500 units with a construction value of nearly $250 million. Its success has spawned a half-dozen imitators around the country. And Terner expects that it will eventually inspire private developers to undertake affordable housing projects of their own. In most cities, providing low-cost shelter relies on the scattershot efforts of energetic but largely inexperienced Birkenstock brigades. They are now getting help from a pair of nonprofit organizations with nationwide scope: the Enterprise Foundation, a Columbia, Maryland, group founded by developer James Rouse in 1981, and the Local Initiatives Support Corp. (LISC) of New York, begun with Ford Foundation money in 1980. Both groups provide financial sophistication and management expertise along with funds. In Cleveland, for example, Enterprise has helped local groups put together an equity pool of $4 million from 25 local companies to rehabilitate homes. It leverages the private investment with public money, negotiates low- interest construction loans from local banks, and distributes the proceeds over eight projects. With future occupants contributing sweat equity, each rehabbed unit can be sold for a modest $20,000 to families with annual incomes of $12,000 to $18,000. Enterprise has helped Cleveland's nonprofit groups lift production from 120 units a year to 300. They aim to remodel 1,000 homes a year by the early 1990s. (For more on what is happening in Cleveland, see Cities.) ENTERPRISE uses its $20 million of assets to work with 86 local groups in 27 cities. LISC is raising over $50 million a year to finance development and rehabilitation in 25 cities. The groups' equity flows from a juicy federal tax , credit that Congress passed in 1986. Investors can deduct from their federal tax bills up to 9% of the total cost of a low-income housing project each year for ten years after the project is occupied. Corporations, however, have been slow to warm up to the program; they have claimed only $50 million in tax credits so far, though Congress authorized up to $300 million per year. Investors are uncertain about the credit's future, and chary of being stigmatized as slumlords. Congress will soon reconsider whether to extend the credits beyond the end of this year. It should. As organizations like Enterprise and LISC continue to show that they can deliver attractive, cost-efficient housing, more corporate investors will be likely to ante up. EVEN HOUSING the homeless and the working poor needn't require subsidies. Booming San Diego had lost more than 2,000 single-room-occupancy hotel units to new development since the mid-1970s. An investment group called BMW Partnership planned to raze the SRO on a parcel of land it owned. But when the site proved too small to convert, BMW decided to see if it could operate the hotel instead. The developer ingeniously packaged its project to maximize amenities on the cheap. It wanted to provide each room with its own bathroom, for example, but subdividing the space to build partitions around the toilet, as the building code required, would have run up costs. So the partners asked the city to designate the entire room as a bathroom. Says managing partner Christopher J. Mortenson: ''It offended the city council's notions of decency, but nowhere in the building code did it say that people couldn't sleep in 'bathrooms.' '' The owners did not scrimp on comforts for residents, however. Each fully furnished 120-square-foot room comes equipped with an all-tile shower, microwave, and TV. Total finished cost: $20,000 per unit -- low enough for BMW to charge rents of $220 to $275 per month and turn a profit. Residents are drawn from a cross-section of the elderly, working poor, formerly homeless -- and the occasional European tourist happy to find a clean, cheap room reminiscent of youth hostels at home. To the 207 SRO units they now manage, Mortenson and his partners will add 418 by year's end. The partners have 400 more units planned, and with other developers starting to show interest, the city expects it will replace all its lost SRO space over the next three years. So far, this thousand-points-of-light approach is adding just 25,000 units a year to low-income stock. How can Washington add battery power? The best approach would be to increase demand, or rather what economists call ''effective demand'' -- the ability of more poor renters to afford market rents. That was the course HUD followed during the Reagan years as it switched from new construction to a system of voucher certificates. At an average yearly cost of $3,500 per household helped, vouchers pay the difference between 30% of their income and the prevailing ''fair market rent,'' which nationally averages $467 a month. HUD increased the number of recipients by nearly 45,000 a year over the past four years. Stuart M. Butler, director of domestic policy studies at the Heritage Foundation and an adviser to Jack Kemp, proposes that the government vastly expand the program. He points out that the federal and state governments already distribute emergency housing assistance equal to HUD's $12.4 billion benefits budget, but it is scattered over several agencies. If all the funds were pooled under HUD, he estimates, vouchers could serve some 55% of all qualifying households -- about the same proportion that entitlement programs reach -- and cut administrative costs. As voucher use spreads and boosts the purchasing power of the poor, Butler expects the added demand will stimulate more private-market housing production. OPPONENTS of vouchers claim that they merely strain the already short supply of cheap rental housing. But even leaving aside regional gluts, vacancy rates for low-income rental housing are high. More to the point, vouchers bring higher-rent housing within reach of the poor. Though recipients have their hardest time in cities like Boston and New York where rent control laws keep apartment turnover low, nearly all find apartments within 60 days. The benefits of vouchers spread far beyond their principal aim. Instead of warehousing the poor in blighted ghettos, they allow recipients to decide where they want to live. In Chicago, James Rosenbaum, a sociologist at Northwestern University's Center for Urban Affairs, is tracking 114 black inner-city welfare mothers and their children who used vouchers to relocate in mostly white suburbs. ''They blend beautifully into their new communities,'' he says. ''This is the most promising approach I've seen yet to promote fair housing.'' It also puts the poor where the jobs are. Giving low-income Americans mobility and choice -- something the old programs never did + -- offers the hope not only of housing them better but also of finally achieving the overdue national goal of a racially and economically integrated society.

CHART: NOT AVAILABLE CREDIT: SOURCE: THE LIST OF 53 MOST IMPORTANT RESIDENTIAL MARKETS COMPILED BY LOMAS MORTGAGE USA CAPTION: WHERE OWNING IS EASY -- AND WHERE IT ISN'T

CHART: NOT AVAILABLE CREDIT: SOURCE: JOINT CENTER FOR HOUSING STUDIES, HARVARD CAPTION: WHO ARE THE HOMEOWNERS Declines among the young are pulling down the national rate. Oldsters are doing better.