Owning your own home. A stable family with kids. Doing better than your parents did. These are all hallmarks of “The American Dream.” As Investopedia defines it:
The term “American dream” refers to the belief that anyone, regardless of where they were born or their socio-economic status, can attain their own version of success in a society in which upward mobility is possible for everyone.
The American dream is believed to be achieved through sacrifice, risk-taking, and hard work, rather than by chance.
But has this dream become unattainable in recent years? Or is there more to the story than meets the eye?
This post will take an in-depth look at how the American Dream has evolved over time and whether it’s still achievable in 2025.
How The American Dream Came to Be
Though the phrase “The American Dream” was first coined by James Truslow Adams in his 1931 bestseller The Epic of America, the core ideas surrounding it had been around since the nation’s founding. The belief in individualism, self-reliance, and land ownership had always been central to the American ethos.
And this became far more apparent in the aftermath of WWII. During this period, the homeownership rate in the U.S. skyrocketed from 44% in 1940 to 62% by 1960 (and continued upward from there):
This increase in homeownership led to higher family formation and cemented the American Dream within society. And though the homeownership rate isn’t as high as it was in 2004-2005 (when it peaked at 69%), it still stands at around 66% today.
But homeownership is just one part of the American Dream. Another is how well people do relative to their parents. And, based on data from 2012, most Americans outearned their parents:
Measured by inflation-adjusted household income, 93% of children who grew up the bottom income quintile were better off than their parents. Of children in the middle three-fifths, 86% grew up to live in families with higher incomes than their parents. Even among those in the top income quintile, 70% were better off.
Though that data is over a decade old, there is newer research showing that Millennials are better off financially than prior generations. As Lending Tree found:
When adjusted for inflation, millennials appear to be in a better financial condition than Gen Xers or baby boomers at similar points…millennials’ net worth was 8.4% higher than Gen Xers’ and 46.2% higher than baby boomers’ at [the same] ages.
Wait a second? If the homeownership rate is still relatively high (66%) and younger generations are doing better financially than their parents, then why does the American Dream seem more unattainable than ever? Let’s turn to that now.
Why the American Dream Became Harder to Achieve
Though the aggregate data on income mobility and homeownership in the U.S. suggests that the American Dream is alive and well, when we take a deeper look, things don’t look as promising.
Lower Income Mobility/Wage Growth
The first problem we see with achieving the American Dream is that income mobility has been slowing for decades. Visual Capitalist created the chart below showing the percentage of people earning more than their parents based upon the decade they were born in. As you can see, fewer individuals in each successive generation earned more than their parents:
Though almost everyone born in 1940 earned more than their parents did, each generation after them outearned their parents by slightly less.
Part of the issue is that wage growth has slowed for most workers over time. As the Economic Policy Institute noted, since 1979 the only group to see significant wage growth was near the upper end of the income spectrum:
What’s causing this? There are many factors at play, but the primary ones seem to be increasing returns to capital and globalization.
In other words, capital is outearning labor and labor has never had more competition (due to foreign workers). If you could use technology to do someone’s job or hire an employee overseas for 1/10th the price, why wouldn’t you? These factors have put a ceiling on wage growth for many American workers. As a result, income mobility in the U.S. is far weaker today than it used to be.
The other problem with looking at income mobility is that it can be distorted by other factors. For example, two researchers at the Federal Reserve found that “each of the past four generations of Americans was better off than the previous one” based on their income.
However, they also discovered that this was only true for Millennials due to a “higher reliance on their parents.” According to a recent article on Fortune, about 50% of parents are still financially supporting their Gen Z and Millennial children. So though the data suggests that Millennials are doing well financially, intergenerational transfers (aka Mommy and Daddy’s money) are part of the reason why.
Rising Cost of Essentials
Putting lower income mobility aside, the American Dream is also becoming harder to achieve because of the rising cost of essentials. As data from the Bureau of Labor Statistics illustrates, the cost of healthcare, education, and housing has skyrocketed over the last two decades:
So though inflation-adjusted wealth is higher today than its ever been, that doesn’t mean that the American Dream is necessarily cheaper. In other words, though people can buy more TVs and iPhones, that doesn’t imply they can buy more housing or education.
Unfortunately, this seems to be true in the data as well. According to Bankrate, “the homeownership rate among young adults (those under 35) declined from 45% in 1990 to 39% in 2022.”
While this is somewhat concerning, it’s also true that homeownership rates have been declining across the board. The National Association of Realtors looked at homeownership rates by income and found that homeownership rates had declined from 2010-2020 for every income group:
It’s easy to argue that young people aren’t buying homes because they can’t afford them. This is definitely part of the story. However, it’s also true that fewer people are buying homes in general. When people who can afford to buy homes (e.g., people with high-income) aren’t buying them, then you know that income isn’t the only issue. Other factors are at play.
For me, that other factor is the 30-year mortgage rate. I would’ve bought a home by now if rates (and prices) didn’t seem so high. However, financially, the math doesn’t add up for me. So that leaves me with two options: (1) save for a much larger downpayment, or (2) save to buy a home in cash. I know that both of these options seem extreme, but borrowing at 7% seems extreme too.
Declining Housing Affordability
Ultimately, my plight in the housing market is the same as many other Americans—affordability. According to Longtermtrends, historically, the average price of a house in the U.S. has been around 5 times the median household income. As of late 2024, the typical U.S. home is around 7.33 times the median household income.
The bad news is that 7.33 is the highest level (aka most unaffordable) we’ve seen in the data. The good news is that 7.33 is similar to the level we experienced in the late 1940s:
As much as I want to say that we are living in an outlier period today (in terms of housing affordability), it might be that 1970-2000 was the true outlier in this regard.
Then again, this data distorts a lot of the bigger changes happening behind the scenes in the housing market. And I mean that literally. As this chart from the American Enterprise Institute shows, the average home size in the U.S. grew substantially between 1973 and 2015:
In particular, new homes today are roughly 1,000 square feet larger than they were in 1973. This all happened during a time when the average household size was shrinking as well.
Putting it all together, U.S. homes are getting more expensive mostly because they are getting bigger. When you control for home size, the inflation-adjusted price per square foot of new U.S. homes didn’t change from 1973-2015:
Though the inflation-adjusted price per square foot of U.S. homes has risen by about 11% since 2020, most of the historical changes in U.S. home prices seem to be related to home size.
Now that we’ve looked at some factors that made the American Dream harder to achieve, let’s wrap things up by discussing how achieving the American Dream doesn’t mean what it used to be.
The Changing American Dream
Has the American Dream become unattainable? If you take the strict definition of “earning more than your parents” and “owning your own home,” then the answer is increasingly “Yes” for many.
However, one of the reasons why the American Dream became less attainable is because it changed. You used to be able to own a smaller house with only a high school degree and still outearn your parents. But now you need a college degree to afford a bigger home to outearn people who outearned people who outearned people, and so forth.
We moved the goalposts and then were surprised that things got harder. We made the American Dream into this exceptional thing and then are somehow shocked that people are falling behind.
But that’s only part of the story. Because while fewer young people own their own homes or outearn their parents, they also travel more frequently (and more cheaply) than prior generations. They have better technology and better healthcare. They have higher quality and more numerous entertainment options. And, lastly, they have wealthier parents (on average) that can assist them financially.
America has changed. So maybe, the American Dream should change with it.
Thank you for reading!
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This is post 450. Any code I have related to this post can be found here with the same numbering: https://github.com/nmaggiulli/of-dollars-and-data
