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?"