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Even If He Can Stop the Sea Levels from Rising Can He Stop Home Prices from Falling?

One of the underreported stories of the election is the direct effect of the popping of the housing bubble. As Greg Mankiw noted last week:

Obama leads in 18 out of the 19 states with the largest recent declines in home prices, whereas McCain leads in 13 out of the 14 states with the largest recent increases in home prices.

The data is here. Both Nevada and Florida flipped to Obama--home prices dropped 14% and 12% respectively in those states. Note also Arizona, where McCain was surprisingly weak. Similarly, I suspect the movement of the Virginia suburbs and exurbs to Obama reflects at least in part the dramatic house-price declines in those areas. I have friends and family members who live in Loudon County who supported Obama because they "hope" that he is going to reverse double-digit declines in house prices, not because he is going to heal the planet or whatever else. And many of the people around here are government employees, so when they say they are concerned about "the economy" I think that what they have in mind is "house prices."

What can President Obama do to help these home-price middle-class voters? Now I know that he is going to stop the sea levels from rising, but that may be easy compared to the bigger challenge of stopping house prices from falling. Economic markets are governed by natural laws of supply and demand, just as the sea levels are governed by natural laws. And it seems like there aren't too many very good options available here. Either can allow markets to continue to readjust and allow house prices to fall back to their equilibrium level, in which case he risks the wrath middle-class voters in Florida, Nevada, and Virginia. If he tries to maintain home prices at an artificially high level, then of course he simply prolongs the market re-equilibration process. Thee are some very difficult political and economic decisions to make here. I don't have any good advice, but one possibility for Obama would be to just let prices bottom out as quickly as possible, take the lumps that will be coming in the 2010 midterm elections and then try to get the housing market back on track by 2012 (sort of like Reagan did with squeezing out inflation in the 1981-82 period).

As an aside, one other thing I've discovered in talking to people around here is that many people who were inclined to vote for McCain were quite concerned about what they understood as McCain's proposal to tax employer-provided health benefits. Many people around here have quite generous and inexpensive employer-provided health benefits that they are very happy with. McCain's proposal seemed to threaten those generous health benefits with no obvious offsetting benefits. And they sure as heck don't want to have their own benefits threatened just to try to extend insurance to the uninsured (sort of like why middle-class voters are often quite hostile to school choice proposals). Obama seemed to frame this issue and McCain did nothing to alleviate it I think because he either didn't understand or didn't believe in his own program. As my dad (who is a Republican who absolutely despises George Bush) said to me, "If McCain can't even explain his own policy why should I trust him?"

FantasiaWHT:
Hey, dropping home prices are also good for renters looking to move into a home of both middle class (who may just live in a high-priced area) and lower class.
11.6.2008 11:41am
A.C.:
I WANT house prices to come down some more. I've been waiting out this bubble, but it's still too early and too expensive for me to get in. What does Obama have to offer me on that front? And don't even think of saying cheap loans. I want the size of the mortgage to be smaller, not just the size of the payment.
11.6.2008 11:48am
Dale Wyckoff:
11.6.2008 11:52am
Thales (mail) (www):
"Economic markets are governed by natural laws of supply and demand, just as the sea levels are governed by natural laws."

Isn't this a bit of an overstatement, or Austrian school quasi-mysticism? I mean the "laws" of supply and demand are strong social tendencies and make for good predictive models and price theory, but it seems to be quite a mistake to put them on the level of natural phenomena such as climate, tides and currents.
11.6.2008 11:53am
Smokey:
Even If He Can Stop the Sea Levels from Rising...
Who does the messiah think he is? King Canute? Sea levels are declining.
11.6.2008 11:56am
Houston Lawyer:
One way to increase home prices is through general price inflation. Given the profligate government spending that the Democrats want, this shouldn't be too big a hurdle to reach. Fortunately, however, the recent commodity bubble has also burst, significantly lowering some inflation drivers. In addition, if you increase taxes on those who were previously bidding up housing prices, they will have less money to spend.
11.6.2008 12:01pm
inkstainedscribe (mail):
I agree that McCain's health plan was a mistake. I understand how tax-free medical benefits from employers distort health spending and personal decision-making. But he could have largely neutralized this effect by giving health insurance purchased outside employment the same tax breaks that are in existing law while providing some tax credit to individuals.

Under those circumstances, companies might not be as likely to dump medical coverage -- and at least allay some of the fears about taxing health benefits.

McCain gave Obama a political opening, and Obama wisely exploited it.
11.6.2008 12:05pm
LT:
"Now I know that he is going to stop the sea levels from rising..."

Is sarcastic snark still necessary? The election is over; at this point, what is the point of this phrase other than to undermine a president-elect who has yet to spend a day in office?

TZ,

I think you need to ask yourself if the cynical tone adds anything to your analysis. If not, consider that it distracts readers from your arguments and turns off those who have left or moderate viewpoints. Perhaps it's time to take a break from overly politicized rhetoric.
11.6.2008 12:06pm
byomtov (mail):
sort of like Reagan did with squeezing out inflation in the 1981-82 period

You mean Volcker, not Reagan. Volcker was appointed to chair the Fed by Carter in August, 1979. He drove up rates sharply. The fed funds rate was almost 16% in Nov., 1980, and this surely contributed to Reagan's victory in that election.

Sorry to interrupt the worship service. You can proceed now.
11.6.2008 12:07pm
gab:

"...sort of like Reagan did with squeezing out inflation in the 1981-82 period)."


Reagan squeezed out inflation? That's a good one. How about Paul Volcker as chairman of the Fed (remind me again who appointed Volcker?) who raised short-term interest rates to 20%.

Reagan was the champion deficit spender who promoted inflation - he didn't "squeeze out inflation."
11.6.2008 12:07pm
starrydeceases:
Reagan was no more responsible for the economic conditions of the 1980's, which were largely driven by falling energy prices thanks to the North Sea oil discoveries, than Clinton was responsible for the economic conditions of the 1990's, which were largely driven by investments in Internet technologies. It was, however, the policies of both of those administrations that directly drove the recessions that immediately followed them.
11.6.2008 12:13pm
guest:
LT:

Yes, please, let's have a moratorium on sarcasm while President Elect Obama waits to take office. What a wonderful idea. Shall we also refer to Him only in hushed tones of reverant awe? Perhaps we should kneel at the mentioning of His name in a gesture of respectful fealty? Ah, what a lovely, humorless four years this will be!
11.6.2008 12:17pm
taney71:
I hope not. I want to buy a house and the prices need to go down more.
11.6.2008 12:17pm
Proud to be a liberal :
I think that McCain ran into trouble in explaining his health insurance program because the underlying theory is that employer-sponsored health insurance provides gold-plated care that distorts the market. Thus, at the debates he mentioned hair transplants as an example of too generous health care.

The fact is that most people do not think that a generous health insurance policy -- one that pays for heart transplants, chemotherapy medications, physical therapy for disabilities, etc. -- is Cadillac care that should be beyond the means of most Americans.

So many commentators devoted so much airspace to the argument that Obama was different from most Americans, but ignored the fact that on health care, he sounded like most Americans when he mentioned his mom fighting for insurance coverage while she was dying of ovarian cancer.

The employer-provided health care insurance is problematic; it is huge drain on employers. However, for individuals, it is nice to have a large group policy and not be insured at the whim of an insurance company that can just drop your coverage. The employer, especially a large employer, has bargaining power with the insurance company. Individuals have no power at all.

And McCain's plan would have removed much protection for consumers by making it easy for insurance companies to avoid state laws regarding health insurance.
11.6.2008 12:18pm
LN (mail):
House prices may be dictated by supply and demand, but supply and demand can be influenced heavily by a set of other factors that are intertwined with voters' political preferences (zoning restrictions, economic growth, population density). It's too bad Greg Mankiw and Todd Zywicki don't have the sort of educational background necessary to understand this.
11.6.2008 12:18pm
Cornellian (mail):
As a renter, I welcome a decline in housing prices.
11.6.2008 12:22pm
guy in the veal calf office (mail) (www):
he should accelerate the move to equilibrium by permitting homeowners to take a tax loss on the sale of their homes. People are loathe to sell houses at a loss (for whatever reason), but might face reality if offered a tax loss.

Its consistent with the idea that homes are an investment.

Its easily implemented, since proceeds from the sale of homes is already reported on 1099 and specifically handled on 1040.
11.6.2008 12:23pm
Calderon:
Re the last paragraph, McCain's health care plan always seemed like something where he said "Well, I know I need a health care plan, but I have no idea what to do, let's get some smart economists to come up with one and then I'll never worry about it again." And the plan they came up with was a very academic plan that might have been well-received among economists (indeed, Furman -- one of Obama's top economic advisors -- had written an article proposing a similar plan) but wasn't going to fly in public without a lot of preparation. There definitely were many way to defend that plan or some variation, especially in terms of controlling costs, introducing more market controls over insurers and doctors, and so forth, but McCain didn't ever really seem familiar with the purposes and benefits of his own plan.
11.6.2008 12:25pm
LN (mail):
To add slightly more substance: most states (California, Oklahoma) are very predictable from an electoral point of view, and Republican states tended to have price increases while Democratic states tended to have price decreases. The direction of causality is very unclear.

Obama flipped NV FL OH VA which all had decreases, but PA IN CO IA MO NC were swing states that all had price increases and still went for Obama.
11.6.2008 12:30pm
Norman Bates (mail):
Steve Sailer has developed a theory which I believe subsumes yours. Areas where land is readily available and construction prices relatively cheap are ideal for those seeking to have large families. These conditions also tend to militate against treating one's house as an investment rather than a dwelling for one's family. Areas where land and land use are highly restricted and competition-suppressing trade unions artificially raise construction costs impose difficulties on those seeking affordable housing in which to raise large families. The situation also encourages housing speculation.(Family Friendly Areas Vote Republican

People with large families are known to tend strongly Republican. (This is an empirical observation not conjecture or theory. I believe there are good causal explanations wfor this whixch would just divert the thrust of this argument.) Putting these facts together it's not at all surprising that the areas where housing speculation caused the most danmage are also the areas where Democrats do well and contrariwise the areas where housing speculation was not rife are the areas where Republicans do well.
11.6.2008 12:36pm
Steve:
The problem with McCain's health care plan is that the obvious intention was to get people out of the employer-based health care system, but they weren't willing to say so. The policy shop didn't spend much time thinking about how it would sell politically.
11.6.2008 12:39pm
Sandy007:
There's actually people out there who are stupid enough to think the new President is going to pay their mortgages. These fools are in for a rude awakening.

Remember, it took the disaster of Jimmy Carter to give us Ronald Reagan, supply side economics, and the resulting 30 years of prosperity. Knowing that the disaster of Obama will have the same effect down the road is the one thing to look forward to come next election.

BTW, nice to see the world's terrorists and dictators congratulating this clown.

Interesting times for sure.
11.6.2008 12:40pm
LC-ite:
I pity you your friends and relations in Loudoun County who voted for Obama hoping he'd reverse the decline of housing prices. Semi-serious question: When the bought their houses, did they not know they were buying into a bubble that had to pop somewhere down the road? Bonus question: Did they vote for the school bonds, too?
I, too, live in Loudoun County, and I've watched the bubble inflate at a furious, ridiculous, pace. Even though I'm a homeowner, I'm glad to see it come down. It needs to come down a little more. Then folks like Cornellian and A.C. can get into the market.
Now if we can just get the government to stop spending money it doesn't have...but that's a different post.
11.6.2008 12:46pm
LN (mail):

There's actually people out there who are stupid enough to think the new President is going to pay their mortgages.


Did you watch the second Presidential debate when McCain promised to do exactly that?
11.6.2008 12:49pm
PC:
There's actually people out there who are stupid enough to think the new President is going to pay their mortgages.

Oddly enough, it was McCain that was offering to use tax payer funds to purchase mortgages, not Obama.
11.6.2008 12:52pm
MarkField (mail):

I WANT house prices to come down some more. I've been waiting out this bubble, but it's still too early and too expensive for me to get in. What does Obama have to offer me on that front? And don't even think of saying cheap loans. I want the size of the mortgage to be smaller, not just the size of the payment.


Speaking politically, not economically, it's not clear that there's a voter base for this. Roughly 60% of Americans own houses already. They don't want prices to decline. I'd guess that roughly 30% more are not in the market for one right now (too poor, not interested, etc.). They don't care one way or the other.

That leaves only a pretty small group which wants the price to decline. In fact, that group may be no larger than the group which might lose their home (or walk away) if prices continue to decline.

The easy political solution to this is to stabilize home prices at current levels and let them decline gradually. Given that political dynamic, you might wait quite a while before finding true bargains.
11.6.2008 12:58pm
Nunzio:
Housing prices had to come down. I understand concern by older folks who may be getting to sell their house in the next few years (or others who are laid off and need to sell soon), but there's no way around this.

Also, I'd love to see data on how many people are selling at a true loss, i.e. bought the house for $750,000 and now have to sell for $600,000), vs. those who have a psychological loss because they would have made more if they had sold at the height of the boom, i.e. bought the house for $500,000 could have sold for $750,000 and now have to sell at $600,000.

Don't get me wrong, the psychological loss is important and people adjusted their behavior based on the anticipation of greater gains but this adjustment of behavior based on gains that were as much speculative as reasonably anticipate contributed to the housing problem.
11.6.2008 1:05pm
PierreM (mail):
"Many people around here have quite generous and inexpensive employer-provided health benefits that they are very happy with."

You can't possible mean this. What you mean is, "Many people around here have health insurance that appears to them to be quite generous and inexpensive..."

It only looks inexpensive because they don't see their employers' cost and don't understand how that money is coming out of their wages. The much touted claim of "stagnant wages" over the past several years hides the fact that total per employee compensation has risen as fast as it did in the 1990's: but almost all the increase was eaten-up by rising health insurance premiums.

Proud-to-be-a-liberal:

"The fact is that most people do not think that a generous health insurance policy -- one that pays for heart transplants, chemotherapy medications, physical therapy for disabilities, etc. -- is Cadillac care that should be beyond the means of most Americans."

Of course they don't, when every politician has been kissing voters a--es for years telling them, "You deserve the best, and I'm going to make the other bastard pay for it." Maybe they should promise every voter's tween daughter a silky pony, too. When you combine a large cohort of aging boomers with 25 million semi-literate and impoverished immigrants with a promise of "universal care" the only outcome will be highly restrictive government mandated rationing. I prefer highly restrictive price-based rationing, beacuse then I can make a rational choice about how much I think my life is worth.

PS: I always chuckle when I think of liberal attorneys pushing for national health care or some kind of health care mandates. Do you think the govt. will continue to pay the "national shysters malpractice premium" to allow medical staff to practice medicine? One of the first things that will be banned will be malpractice lawsuits.
11.6.2008 1:07pm
The Unbeliever:
Oddly enough, it was McCain that was offering to use tax payer funds to purchase mortgages, not Obama.
True enough, and another reason I was forced to vote 3rd party this election. Transcript:
We've got to have a package of reforms and it has got to lead to reform prosperity and peace in the world. And I think that this problem has become so severe, as you know, that we're going to have to do something about home values.

You know that home values of retirees continues to decline and people are no longer able to afford their mortgage payments. As president of the United States, Alan, I would order the secretary of the treasury to immediately buy up the bad home loan mortgages in America and renegotiate at the new value of those homes -- at the diminished value of those homes and let people be able to make those -- be able to make those payments and stay in their homes.

Is it expensive? Yes. But we all know, my friends, until we stabilize home values in America, we're never going to start turning around and creating jobs and fixing our economy. And we've got to give some trust and confidence back to America.
11.6.2008 1:13pm
J. F. Thomas (mail):
Steve Sailer has developed a theory which I believe subsumes yours. Areas where land is readily available and construction prices relatively cheap are ideal for those seeking to have large families. These conditions also tend to militate against treating one's house as an investment rather than a dwelling for one's family. Areas where land and land use are highly restricted and competition-suppressing trade unions artificially raise construction costs impose difficulties on those seeking affordable housing in which to raise large families. The situation also encourages housing speculation.

Krugman is also floating a theory similar to this, although he bases his theory on the strength of zoning laws. The problem with both these theories is that they are contradicted by reality. Look at some of the areas where the housing bubble was worst--Las Vegas, Phoenix, and Florida. They, according to the theory you are touting, shouldn't have been bubble markets, but they were. Similarly, areas where the building trade unions still hold sway and have strict zoning (like most of the midwest), simply didn't see either the rises or the subsequent fall off that other markets did (even Chicago's bubble wasn't as big as other cities'). And even in California, the hardest hit areas are in the extreme exurbs and in the less desirable cities like Fresno and Sacramento.

Besides, how does this explain Obama's success in North Carolina, a state where housing prices are extremely stable (although about to fall).
11.6.2008 1:14pm
Josh644 (mail):
Um, the bubble popped a long time ago. It's called a bubble when prices are inflated. When they're HIGH.
11.6.2008 1:15pm
TerrencePhilip:
This is not surprising- Ray C. Fair's econometric prediction was more accurate than many opinion polls in predicting the outcome of the election.
11.6.2008 1:16pm
Sandy007:
<blockquote>
LN:<i> Did you watch the second Presidential debate when McCain promised to do exactly that?</i>
</blockquote>

LN, of course I saw it. Both candidates were promising similar nonsense. Dem voters approve of such garbage, repub voters don't. One more reason McCain lost.
11.6.2008 1:17pm
J. F. Thomas (mail):
You can't possible mean this. What you mean is, "Many people around here have health insurance that appears to them to be quite generous and inexpensive..."

No, compared to what similar coverage would cost for an individual to purchase, most employer-provided health insurance is quite generous and inexpensive--especially if you have any kind of, even rather minor chronic condition (e.g., asthma, migraines, diabetes, high blood pressure, clinical depression). It's called the pooling of risk, something that simply will not be available in your libertarian medical hell.
11.6.2008 1:21pm
J. F. Thomas (mail):
Um, the bubble popped a long time ago.

Actually, it is still popping, and in some places (e.g., NYC and maybe Charlotte) it has just started to pop.
11.6.2008 1:23pm
LN (mail):
Sandy, to recap:

1. McCain promises to buy up mortgages, Obama does not promise to do this.
2. Obama wins the election, McCain does not.
3. Obama is a Democrat, McCain is a Republican.
4. Democrats tend to vote for Obama, Republicans tend to vote for McCain.
5. This is just further evidence that Democrats are stupid and Republicans are smart.

Somehow I think you would reach step #5 no matter what preceded it.
11.6.2008 1:25pm
Stacy (mail) (www):
"I have friends and family members who live in Loudon County who supported Obama because they "hope" that he is going to reverse double-digit declines in house prices, not because he is going to heal the planet or whatever else."

If true, these people are the most craven members of the voting public. They can only "hope" Obama raises house prices if they "hope" that he'll put the crazy bubble train back on the rails - leading to an even bigger crash sometime in the future, but "hope"fully after these self-absorbed people have found a greater fool to buy their overpriced houses.
11.6.2008 1:33pm
Norman Bates (mail):
J. F. Thomas: Your criticisms are more with my statement of Sailer's theory than the theory itself. Sailer bases his argument on the avaiability of buildable land. Las Vegas, Phoenix, and Florida actually support the theory. The buildable land in these areas is actually very restricted if you take into consideration things like availability of water and ease in commuting to the nearest work, shopping, etc. In the midwest buildable land is basically anywhere that construction hasn't already occured. I suspect that the economy explains NC. The state has experienced significant declines in major industries. (In a dog bites man kind of story some high tech plants have left NC for MA because of generous tax breaks and an over-supply of tech employees that has kept wages low relative to NC.)
11.6.2008 1:37pm
LT:
"Yes, please, let's have a moratorium on sarcasm while President Elect Obama waits to take office. What a wonderful idea. Shall we also refer to Him only in hushed tones of reverant awe? Perhaps we should kneel at the mentioning of His name in a gesture of respectful fealty? Ah, what a lovely, humorless four years this will be!"

People can use sarcasm if they wish, and there are certainly times and places for it.

What you haven't answered is what snarky phrasing adds to the discussion. Again, I contend it has a cost (turning off some people) with little benefit - it detracts and distracts from the analysis.
11.6.2008 1:38pm
Calderon:
It's called the pooling of risk, something that simply will not be available in your libertarian medical hell.

Totally, because we know that only employers can buy insurance that pools risk. I just hope that Obama's government passes laws that requires my law firm to offer automotive, life, and homeowner's insurance soon. I'd like to buy policies for these, but I can't because those darn markets can't figure out how to pool risk unless an employer does it for them.
11.6.2008 1:41pm
byomtov (mail):
Both candidates were promising similar nonsense.

Can you show me where Obama said he wanted to buy up all the mortgages?
11.6.2008 1:42pm
Elliot123 (mail):
"Is sarcastic snark still necessary? The election is over; at this point, what is the point of this phrase other than to undermine a president-elect who has yet to spend a day in office?"

Obama is responsible for what he told people, both the content and tone. If his own rhetoric uses images of a savior, then that's something he has to live with. He can't ditch it because the campaign is over.

It is quite rasonable to ask people over the next few years when Obama is going to roll beck their own personal rising sea levels. "Have the waters gone down for you?"
11.6.2008 1:43pm
J. F. Thomas (mail):
The buildable land in these areas is actually very restricted if you take into consideration things like availability of water and ease in commuting to the nearest work, shopping, etc.

Anyone who thinks that there is a lack of buildable land in Las Vegas, Phoenix, and Florida is ignoring reality to make their pet theory fit. They certainly have more buildable land than areas like coastal California or the D.C. area that also had a big bubble and certainly their physical limitations were no greater than other areas (e.g., Chicago, Kansas City) that saw much smaller bubbles. All those areas experienced a huge residential building boom in the first half of the decade. They overbuilt, people buying to flip and exotic mortgages drove up prices. Now there is a glut and prices are plunging.
11.6.2008 1:48pm
Calculated Risk:

Economic markets are governed by natural laws of supply and demand, just as the sea levels are governed by natural laws.


You are seriously confused.

There was nothing "natural" about the housing bubble. There is nothing "natural" about periodic and irrationally extreme market fluctuations either.

Economics is not a "natural science" just like physics. Okay? That you would suggest otherwise flies in the face of historical and even very recent "unnatural" market events.

Why are there so many idiots out there with such simplistic ideas about markets. The invisible hand is just a metaphor. Get over it! By the way, Adam Smith was no libertarian.
11.6.2008 1:51pm
Sandy007:
LN, I'm pretty certain I didn't say a word about the intelligence of Republicans. Maybe you have me confused with someone else?

Btw, tell me this fool isn't in for a rude awakening, and I'll pay your mortgage: www.youtube.com/watch?v=L6ikOxi9yYk ;-)
11.6.2008 1:53pm
J. F. Thomas (mail):
I just hope that Obama's government passes laws that requires my law firm to offer automotive, life, and homeowner's insurance soon.

The function of these insurances (to protect against catastrophic loss) is different than that of medical insurance, which should ideally be focused more on preventive maintenance than catastrophic loss.

Besides, unlike automotive, life and homeowners, there is a lot more that can go wrong with your body than your car or home. If insurance is not mandatory, insurance companies will simply refuse to cover those who they deem a risk. This also happens in both the homeowners and automotive pools which is why states (and the federal government) have last resort programs to cover the uninsurable. I assume good libertarians object to these programs too. In your world, those who can't afford or even obtain insurance at any price must bear the risk themselves.
11.6.2008 1:55pm
Richard Aubrey (mail):
J.F.
WRT health insurance, group vs. individual.
Wrong. Couldn't be more wrong. Wrongest.
I'm in the business. Group health insurance is horrendously expensive, in the sense that the check the employer writes to the insurer is quite large.
But, due to its invisibility, its tax deductible status, and the ability to pass the cost along to the consumer, it looks "free" to the employee.
In fact, many products of our public educational system actually think it's free.
It is also particularly good insurance, covering a good many items with low deductibles and co-pays. Among other things, if you give an employee a better health plan, the increased premium does not generate FICA taxes, unemployment insurance fees and work comp premiums (which are based on payroll) and the employee doesn't have to report it. So bumping up the health plan is attractive, to a limit which we seem to have reached.
Find somebody who's had to go on COBRA and ask them if they think that premium, which is what the employer pays, is cheap. They'll need a spot of brandy and a vigorous slap on the cheek to regain consciousness, though.
Individual plans cost less--unless the insured is getting on in years--because you can't sell the group-level premium to an individual who doesn't get a tax break and can't pass it along to anybody. And with lower premiums comes less generous care.
Individual policies will all keep the roof on the house, but the era of taking a day off work to go to the physician's office with a runny nose and wave a card, while getting and giving germs to the other patients are over. It comes out of your pocket.
Wrong, wrong, wrong.
11.6.2008 1:58pm
Dave Hardy (mail) (www):
1. Stopping house price declines is easy. Just pass legislation forbidding house sales at less than the 2006 assessment. Now there will be no house sale price declines. There will also be no house sales, either, but at least prices won't decline.

2. As far as McCain's health insurance position, I thought I'd be screwed; $19,000 a year in family premiums, only a $10,000 tax credit. It took a while to compute that the $19K could be shifted to salary, and after taxes were taken out I'd probably break even. This is not easy to explain to the average voter. I don't recall him ever trying. And the average voter would have no guarantee that the employer would pass it on via a salary increase, or that they could individually get the same deal as a large employer could.

3. Not to mention that the plan would have to protect against the employee getting zapped with exclusions for pre-existing conditions.
11.6.2008 2:10pm
J. F. Thomas (mail):
Individual plans cost less--unless the insured is getting on in years--because you can't sell the group-level premium to an individual who doesn't get a tax break and can't pass it along to anybody. And with lower premiums comes less generous care.

I don't see where I was wrong. Your point is that for a young, healthy, individual (without children) individual coverage is cheaper than most company plans. That is true. But I bet those people are a minority in this country, not a majority.

You forgot, besides age, chronic or preexisting conditions, will make insurance extremely expensive, if not downright unobtainable. As I mentioned, even relatively minor chronic conditions can quickly become incredibly expensive to treat. A typical prescription drug regime for migraine headaches can easily cost well over $7000 a year if they are not covered by insurance. I know this from personal experience, I take two drugs to control migraines (Topomax and Imitrex). They would be over $7000 a year if I had to pay for them out of pocket (around $200 a month of the Imitrex and $400 for the Topomax). That doesn't even begin to cover the Neurologist appointment.

So I guess if you never get sick, don't have children, don't have any chronic conditions, well hell yeah, individual coverage is the way to go.
11.6.2008 2:10pm
tsotha:
lso, I'd love to see data on how many people are selling at a true loss, i.e. bought the house for $750,000 and now have to sell for $600,000), vs. those who have a psychological loss because they would have made more if they had sold at the height of the boom, i.e. bought the house for $500,000 could have sold for $750,000 and now have to sell at $600,000.

The problem, as I understand it, is these people bought the house at $500,000, had it appraised at $750,000 and borrowed (and spent) another $250,000 against the appreciated asset. Now that it's worth $600,000 they're upside-down and don't have the income to cover the payments when their interest rate adjusts next year.

It's true the loss on the house is psychological, but they made it material with that second loan. Now they have a problem the rest of us are going to end up dealing with.
11.6.2008 2:23pm
Oren:

In your world, those who can't afford or even obtain insurance at any price must bear the risk themselves.

I refuse to drive on the road with uninsured and insolvent idiots who can cause me grave personal and property damage without recourse.
11.6.2008 2:25pm
Tony Tutins (mail):
Idiot speculators aside, the basic problem is that ARM resets have made monthly payments unaffordable. Homebuyers find substitute housing, walking away from their loans and their homes, making the demand for housing look less than it actually is, as the supply of homes for sale goes up. Houses sold at foreclosure prices artificially deflate home prices.


Totally, because we know that only employers can buy insurance that pools risk. I just hope that Obama's government passes laws that requires my law firm to offer automotive, life, and homeowner's insurance soon.

The larger the sample to be insured, the closer the sample is to the general population, and the lower the cost to insure each individual. Whereas individual automotive, life, and homeowner's insurance pricing is based on the risk each individual presents. Get a traffic ticket or two, and watch your rates go up. Cause an accident, and your rates will increase till you've paid for the damage you caused. Individual insurance tends to be a zero sum game.
11.6.2008 2:30pm
hattio1:
Sandy007;
That idiot is NOT in for a rude awakening. Now will you pay my mortgage? Oh, you wanted someone to be serious when they said that? Should be more careful, I think we have a contract.
11.6.2008 2:57pm
Calderon:
To J. F. Thomas, the point is that market are quite capable of pooling risk, contradicting the claims in JFT's post that "pooling of risk ... will not be available in your libertarian medical hell." What private markets try to avoid doing is cross-subsidizing groups that have different levels of risk. If your point is "no, we want to require low risk people to subsidize high risk people," then you should say that rather than make the plainly incorrect claim that risk pooling wouldn't be available in free markets.
11.6.2008 2:57pm
Richard Aubrey (mail):
J.F.
Major meds have out of pocket maximums. Including prescriptions.
You pay x for the deductible during the year, you pay y% of the next, usually, $5000. The company pays 100% of the balance up to a couple of million, or five million.
I already told you I am in the business.
Try fooling somebody who isn't.
11.6.2008 3:06pm
Gramarye:
Obama's measured response would probably be that he can't reinflate the bubble and wouldn't even if he could. The Fed has lowered interest rates to nearly rock bottom and it is not pushing house prices back to their previous levels. In addition, inflation would take away from everyone (through lower real portfolio values and higher energy and food prices) what it gave back in nominal house value.

What Obama would likely promise in return would be to try to make life easier for the overextended middle class (which describes much of Loudoun County) in other ways to make up for the fact that their houses' values are unlikely to reascend the empyrean heights they once occupied.
11.6.2008 3:12pm
Doc W (mail):
So--when house prices go up, that's bad because fewer people can afford houses, or they have to settle for smaller and less fancy than they's prefer (or than the zoning gestapo will let them afford). When house prices go down, that's bad because people who took out speculative mortgages lose the houses they couldn't afford in the first place. Give me a break. Buy what you can afford, or take your lumps. If you're a lender, lend to those with incomes and credit records suggesting that they can and will pay up--or take your lumps. If government meddling in credit and housing markets undercuts sensible decision making, stop the government meddling.


There was nothing "natural" about the housing bubble. There is nothing "natural" about periodic and irrationally extreme market fluctuations either.

Exactly. Their origins lie mainly in government interference with the market and the money supply. Ask the Austrian economists.
11.6.2008 3:27pm
tsotha:
Yeah, the problem with health insurance is it really is insurance, and sometimes it doesn't make sense to insure someone. There are people in the workforce who would not be able to purchase insurance at any price, and would not be able to afford care. I had an employee like that some years ago. She had a condition that required surgery every few months, and had already exhausted the lifetime cap on two of the three policies our company offered.

She'll never make, in her life, enough money to cover the costs she incurred by her mid twenties. I don't see how any kind of politically palatable health plan can just ignore people like that.
11.6.2008 3:37pm
tsotha:
Idiot speculators aside, the basic problem is that ARM resets have made monthly payments unaffordable.

You don't consider someone an idiot speculator if he had no hope of making payments on an ARM when the rate reset? I find that position a bit odd.
11.6.2008 3:42pm
wfjag:

Buy what you can afford, or take your lumps.

You're assuming that employees are paid for their labor. Some employers, however, find it convenient to call the police when unpaid employees show up demanding to be paid.
www.wthr.com/Global/story.asp?S=9299280
11.6.2008 3:47pm
Elliot123 (mail):
Is it out of line to suggest the American population is largely composed of economic morons who have little knowledge of history?

How many think housing and stock prices always go up because they have never seen them go down?

How many think they should take out the biggest mortgage they can because that will guarantee the greatest appreciation in their house?

How many know what a demand curve looks like?

How many know the difference between revenue and profit? (The NYT had difficulty with this one on their front page earlier this year.)

How many know who owns the big corporations?

How many know the basic structure of capitalism?

How many know how compound interest on a credit card works?

How many think it's smart to make the minimum credit card payment?

How many know the breakdown of interest and principal on their mortgage payment?

How many know what percent of federal income tax is paid by the top 1% of earners? Top 10%? Lowest 40%?

None of these are difficult to understand, and it's not difficult to convey the basic concepts. It certainly doesn't take a college level econ course. I can explain all these ideas to the average person in less than an hour.

But, speaking of econ courses, and recognizing that this election was largely decided on economic matters, how many college grads have never taken an econ course? How many law school grads? How many community organizers?
11.6.2008 4:11pm
Thorley Winston (mail) (www):

Individual plans cost less--unless the insured is getting on in years--because you can't sell the group-level premium to an individual who doesn't get a tax break and can't pass it along to anybody.


True and in addition, most people with private health insurance get it through a self-funded plan from their employers. This is key because under ERISA they're exempt from the State-imposed benefit mandates which make up anywhere from 15-30 percent of the cost of the premium thereby making health insurance even less affordable for people who buy it on their own or for smaller employers.

McCain's proposal to allow people to buy health insurance across State lines -- like they can for pretty much every other product -- was spot on because it would allow people to buy a plan with the benefits that they wanted rather than whatever their States imposed to accommodate whichever political pressure groups have the most clout.

Unfortunately Obama has proposed to create a national "exchange" that would require that private plans now include whatever benefit mandates are found in Obamacare. Because this would be at the federal rather than State level, no ERISA preemption which means that if you get your insurance through a self-funded plan at your employer, you could start to get a taste cost and benefit-wise of what it's like for people who buy their own health insurance and wind up paying a lot more for a plan that covers benefits that they don't want but are required to carry to appease whoever had the best lobbyists in the legislative branch.
11.6.2008 4:13pm
J. F. Thomas (mail):
How many think housing and stock prices always go up because they have never seen them go down?

Apparently a hell of a lot of our supposedly most savvy and brilliant financial wizards on Wall Street (along with Alan Greenspan, the SEC and almost everyone else who lauded the false economy of the last six years or so) who snapped up Mortgage Backed Securities and even more exotic financial instruments based on just this supposition.

You pay x for the deductible during the year, you pay y% of the next, usually, $5000. The company pays 100% of the balance up to a couple of million, or five million.
I already told you I am in the business.
Try fooling somebody who isn't.


I am not trying to fool anyone as I was clearly referring to the cost of the medicines if they were not insured by prescriptions. The point I was making is that no insurance company would insure me for less than the costs of my medicine if they knew what my expenses would be over the course of a year. And I don't even consider myself that unhealthy. A $5000 tax credit would do me precious little good if I was paying at least that much for medical insurance plus shelling out another $5000 for a deductible.

Besides, there is no requirement, at least under McCain's plan, and certainly under the kind of policies libertarians would endorse, that prescription drugs would have to be covered under insurance.
11.6.2008 4:27pm
Dave Hardy (mail) (www):
"You forgot, besides age, chronic or preexisting conditions, will make insurance extremely expensive, if not downright unobtainable."

Or they just exclude whatever you have from coverage. Or the entire bodily system associated with it. My wife likes to see a chiropractor, believes in whatever it is they do. When she applied for Blue Cross and disclosed that, they excluded any spinal ailments from coverage.
11.6.2008 4:40pm
A.C.:
J. F. Thomas --

Not all of us agree that health insurance should be designed for prevention. People should pursue preventative health care, but the cost of this tends to be predictable. People can budget for it. It would be okay to subsidize this sort of thing for the very poor, especially if doing so saved money for some government program that would have to treat them otherwise. But most of us should pay for our own.

The mid-scale problem is severe but temporary illnesses and injuries that run up bills in a given year. These don't happen to most of us most years, and a classic insurance model works just fine here.

The large-scale problem is what to do about people with expensive chronic conditions. Insurance isn't really the right model, and it is unreasonable to ask people to pay their own ways in most cases. It's even unreasonable to ask many employers and insurance companies to pay. The case tsotha mentions is an example. THIS is the group I would like to see subsidized by the government. I'm not in the group myself and do not want to be, but I would call this a "there but for the grace of God" program. We all hope we never need it, but it would be nice to know it's there.

And then there is the silent problem that nobody wants to talk about. How much heroic medicine should be used to prolong life in terminal cases when the eventual outcome is clear?
11.6.2008 4:45pm
AF:

Obama leads in 18 out of the 19 states with the largest recent declines in home prices, whereas McCain leads in 13 out of the 14 states with the largest recent increases in home prices.


Um, 14 out of the 18 declining-home-price states that Obama won were Kerry states, and the other 4 (FL, NV, VA, OH) were close (8 points or less) in 2004.

Of the 13 home-price-increasing states that McCain won, Bush won all of them. And Obama won one state with rapidly increasing home prices -- North Carolina -- even though Bush won it in 2004.

So it's very hard to conclude that the outcome of the presidential races in these states is because of home prices.
11.6.2008 4:54pm
J. F. Thomas (mail):
I'm not in the group myself and do not want to be, but I would call this a "there but for the grace of God" program.

Gee, maybe we could start by coming up with a government health care program that covers just the elderly, since they tend to have much higher than average health care bills. Maybe pay for it with a payroll tax. Then if that works out well significantly raises the quality of life of seniors and operates more efficiently than private insurance, we could expand the program to those with chronic diseases.

I can't imagine that libertarians would object to government health care for seniors. But maybe that is even too much to hope for.
11.6.2008 4:55pm
A.C.:
Just covering seniors is under-inclusive, as you note, because it does not include working-age people (or children) with expensive conditions.

But it is also over-inclusive, because it includes lots of people (especially the young old) whose health expenses aren't any more outrageous than what everyone else is expected to deal with somehow. Some of these people are also quite wealthy.

People who have an excellent run during their working years and now need to pay several thousand a year out of ample savings are not the same as people who will never earn enough to cover the costs they incurred while their peers were young and fit and able to work hard.
11.6.2008 5:09pm
Elliot123 (mail):
"Apparently a hell of a lot of our supposedly most savvy and brilliant financial wizards on Wall Street (along with Alan Greenspan, the SEC and almost everyone else who lauded the false economy of the last six years or so) who snapped up Mortgage Backed Securities and even more exotic financial instruments based on just this supposition."

Like I said, the US population is largely composed of economic morons with little knowledge of history.
11.6.2008 5:11pm
Blar (mail) (www):
Effect of the popping housing bubble? Forget causation - there isn't even correlation here. Obama's gains over Kerry are not related to any of the variables in that chart. If you take Obama's vote share (from that chart), subtract Kerry's vote share (from the next column), and correlate the difference with the change in home prices, the correlation is -.08. That's in the predicted direction (rising home prices bad for Obama), but it's basically zero.

The other two variables (unemployment rate &change in personal income) both go in the opposite direction of what's being predicted, but they're also both basically zero. For unemployment rate, the correlation with Obama's vote gain is -.14 (higher unemployment rate bad for Obama), and for change in personal income the correlation is .11 (bigger increase in income good for Obama). (See here for someone else's fancier statistics.)
11.6.2008 5:30pm
elcaminoabby:
Jim Cramer was giving advice to Obama yesterday on Mad Money (thanks for playing CNBC in the break room boss) and his suggestion on the housing crisis was to burn down houses. Yeah, New Deal style like crops. Destroy the supply, demand will rise, raise housing prices. Supposedly.
11.6.2008 5:30pm
darrenm:
I seem recall an economic argument from several years ago that asserted all benefits should be taxed to level out the labor market distortions caused by subsidizing employer-provided health care, for example. There could easily be offsetting deductions or tax decreases. This included welfare payments, so people would not be penalized for getting job and off welfare, the problem being that some who got a job ended up getting less than they received on welfare.
11.6.2008 6:43pm
darrenm:

How much heroic medicine should be used to prolong life in terminal cases when the eventual outcome is clear?


The eventual outcome is always clear and always the same. :)
11.6.2008 6:54pm
Richard Aubrey (mail):
Guys.
Federal law requires each state to have a last-resort health plan which will take everybody. I mean anybody.
Witout regard to pre-existing conditions.
There is one problem for the Obama lovers, though. The companies don't want to be in the position where you stop in on the way to the Cleveland Clinic, pay a month's premium, and drop it when your treatment is concluded. So they will require a certain amount of time of coverage before pre-ex are covered.
Sort of not like letting people whose homes are still smoldering buy homeowners insurance, expecting to get paid.
11.6.2008 7:03pm
autolykos:

There is one problem for the Obama lovers, though. The companies don't want to be in the position where you stop in on the way to the Cleveland Clinic, pay a month's premium, and drop it when your treatment is concluded. So they will require a certain amount of time of coverage before pre-ex are covered.


As they should. It's not really insurance if a person can just pick it up when they get sick.
11.6.2008 7:52pm
hattio1:
Richard Aubrey says;

Guys.
Federal law requires each state to have a last-resort health plan which will take everybody. I mean anybody.


Citation??
11.6.2008 8:09pm
byomtov (mail):
but that may be easy compared to the bigger challenge of stopping house prices from falling. Economic markets are governed by natural laws of supply and demand, just as the sea levels are governed by natural laws. And it seems like there aren't too many very good options available here. Either can allow markets to continue to readjust and allow house prices to fall back to their equilibrium level,.....If he tries to maintain home prices at an artificially high level, then of course he simply prolongs the market re-equilibration process.

You seem to be assuming that the prices are going to continue to drop. Maybe so, but how about a reason?

House prices depend heavily on the state of the economy. We're not going to have a quick recovery, but we will have one. I expect we'll see a stimulus package come out of Congress pretty early next year. Maybe that will get things going by summer or fall.
11.6.2008 8:35pm
Calculated Risk:

You seem to be assuming that the prices are going to continue to drop. Maybe so, but how about a reason?


I think Zywicki would say that they would fall because that is the "natural" thing for them to do. *eyeroll*
11.6.2008 8:39pm
Richard Aubrey (mail):
hattio.
Ask me for a cite making left turns illegal on Miller Rd.
This has been fed law for some years. Ask an insurance agent. Ask an HR person.
Try HIPAA.
Jeez
11.6.2008 9:45pm
Sagar:
Good title for the post!

Even if the snark is unwarranted, it is catchy:-)

Don't forget the "heal the planet" promise when the occasion arises.
11.6.2008 10:09pm
Sagar:
those of you investors complaining about the falling share prices:

this is a gift to those who are not investing yet, so they can get into the stock market when the prices are low. (kind of like how declining home prices are good for the renters)
11.6.2008 10:11pm
Smokey:
You seem to be assuming that the prices are going to continue to drop. Maybe so, but how about a reason?
Easy. More sellers than buyers.
11.6.2008 11:08pm
Brian K (mail):
Like I said, the US population is largely composed of economic morons with little knowledge of history.

sounds like a failure of the free market system then, no? i mean, if the free market picked economic morons to head up banks, hedge funds, mutual funds, etc. then it doesn't say much about the free market being able to efficiently do much of anything.
11.6.2008 11:29pm
paulV (mail):
People were willing to pay increasing prices for housing because it was "good" investment as housing prices were going up. Now that housing is deemed a "bad" investment people will not pay a premium for possible increases in future vale. Any attempt to mintain a premium only keeps the market from raching stability.
11.6.2008 11:56pm
MCM (mail):
Even If He Can Stop the Sea Levels from Rising...

Who does the messiah think he is? King Canute? Sea levels are declining.


Absolute hogwash. You have cherry-picked a single study that contradicts the results of numerous others. Bad science and intellectual dishonesty at their worst.
11.7.2008 12:32am
Elliot123 (mail):
"You seem to be assuming that the prices are going to continue to drop. Maybe so, but how about a reason?"

One reason is it will no longer be easy to get a mortgage without stable employment, good credit, and a down payment. That reduces demand for houses, which is a downward presure on prices.
11.7.2008 11:01am
byomtov (mail):
One reason is it will no longer be easy to get a mortgage without stable employment, good credit, and a down payment. That reduces demand for houses, which is a downward presure on prices.

Fair enough. But to the extent that is already happening, or is fully expected, are we sure the biggest impact hasn't been felt?

I'm not arguing about housing prices. I have no strong opinion about their direction. I just wonder whether all the assumptions about how prices are going to kep dropping are on much firmer footing than the previous assumption that they will continue to rise.
11.7.2008 11:32am
Stacy (mail) (www):
elcaminoabby: "Jim Cramer was giving advice to Obama yesterday on Mad Money (thanks for playing CNBC in the break room boss) and his suggestion on the housing crisis was to burn down houses. Yeah, New Deal style like crops. Destroy the supply, demand will rise, raise housing prices. Supposedly."

Actually quite a few cities with declining populations (mostly in the rust belt) have been tearing down abandoned houses, basically to remove the rot, as it were, before it infects nearby properties.

Cramer may have been kidding, but removing empty houses isn't as crazy as it sounds. Done right, it could create economic activity during the recession and help reposition - literally - the US population in a more economically sustainable pattern vis a vis the rising cost of transportation.
11.7.2008 1:19pm
Richard Aubrey (mail):
Stacy.
The places being torn down are in the center of the cities. There will be no more housing built there until the rabbit warrens for the proles are put up.
Until then, the effect on and utility of the transportation system will not change.
11.7.2008 3:37pm
Elliot123 (mail):
"Fair enough. But to the extent that is already happening, or is fully expected, are we sure the biggest impact hasn't been felt?"

That will depend on the stock of housing being offered on the market. Sales have been declining, and the stock of houses available for sale has been increasing. Some who want to sell have withdrawn from the market, but would like to sell, so it's murky.

There is no reason to think prices will decline forever. They will reach a point where the the market clears. I wish I knew where it was.

Alaska in 1987(?) is a good example. When oil prices fell to $9.50 per barrel, housing tanked. I paid $100k in 1981. Comparables sold at $160 in 1986. In 1987 comparables sold for $36k. I sold in 1991 for $95k.

So, I'd look for the factors that are upward pressures, and the factors that are downward pressures. I don't see any upward pressures now. I do see downward pressures.
11.7.2008 3:44pm
Prof. S. (mail):
Someone may have said this in the numerous comments already, but wouldn't one way to make housing prices go up be to have sea levels go up?

I mean, if you flooded Florida, wouldn't the law of supply and demand help out the rest of the states? How about pushing California into the ocean?

I'm just saying....
11.7.2008 4:04pm
markm (mail):
hattio1: I think Richard Aubrey was referring to Medicaid. I can't cite the enabling federal laws, but I don't know of any state that doesn't have a similar program - and it does provide basic medical insurance to anyone who is really impoverished. As in near-zero net worth, barely enough income to get by, and no unnecessary expenses that are so obvious even a welfare bureaucrat can't miss them.

So what those bemoaning the fate of the uninsured are really worried about isn't people being unable to get the rest of us to pay for their medical care - it's being unable to get the rest of us for their medical care before they've lost their house.
11.10.2008 9:56pm