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Nicole Gelinas

The end of the housing crisis

Although Hurricane Sandy is considered this election’s October surprise, there is another one: The national housing crisis, which has defined the national economy for the past half-decade, is over. That’s not an automatic boon for President Obama, though. Instead, it’s an illustration that politicians can’t fix everything. Some problems need time — and free-market forces — to fix.

The 2008 election was all about the housing bust. Americans knew they were in trouble as early as 2007, after housing prices had stagnated and then fallen for a year. They could no longer take equity out of their houses to keep up their consumer spending — a looming disaster for the economy, which depends on such spending. But few inside the Beltway noticed until fall of 2008, when falling home prices caused a financial crisis for Wall Street.


Obama won in part because he understood the problem better than his opponent did. In his 2008 convention speech, Obama said that people “watching your home values plummet” should know that “the failure to respond is a direct result of . . . the failed policies of George W. Bush.” GOP nominee John McCain didn’t mention house prices in his speech at all.

But despite grasping the problem, Obama never did anything about falling house prices. At the end of Obama’s term, prices are down a third nationwide since their 2006 peak (more in Florida, Las Vegas, and central California). Between early 2009 and this January, they fell by 7 percent.

In his own convention speech this summer, Mitt Romney hit Obama for this failure, just as Obama had hit his predecessor four years earlier. “When the realtor told you that to sell your house you’d have to take a big loss . . . you knew that this just was not right,” Romney said to his audience.


This line of attack falls flat. Falling home prices weren’t Obama’s fault. After doubling within six years, house prices had to come down. The only way to cure a bubble is to let that bubble burst. That is what happened.

Similarly, much of the fallout from the housing bust wasn’t Obama’s fault. After the housing bubble burst, people still had to repay the debt they borrowed during the bubble. Between 2000 and 2007, mortgage debt more than doubled, from $4.8 trillion to $10.6 trillion, according to Federal Reserve data. Other types of debt, like credit-card debt, rose by 45 percent, to $2.5 trillion.

It followed, then, that people had to cut back on spending after 2006. They had to get used to the fact that they couldn’t take equity out of their houses to cover the bills.

Americans got the austerity memo long before Washington did. They’ve pared down their housing debt by 9 percent and paid down other types of debt, too. This month, new consumer defaults on credit cards and mortgages hit post-recession lows. “2012 has proven to be a period of financial repair for consumers,” said David M. Blitzer of Standard & Poor’s.

That repair is paying off. Retail sales were up significantly this summer, the first time that happened in years. People are splurging on modest luxuries — clothes for themselves instead of their children, and restaurant meals. They wouldn’t do that if they didn’t feel better.

It’s no mystery things are looking up. Home prices only had to fall so far, and now they have. They’ve been up consistently, too, for the past few months. People can see that their neighbors are selling homes for more than similar houses sold for last year. They see, too, that long-empty homes are finding buyers.


This change instills confidence — and relief.

Conventional wisdom holds that voters would punish Obama for a terrible economy — and thus should reward him for an improving one.

Yet conventional wisdom may be wrong, just as it has about the entire economic crisis.

Voters never really blamed Obama for our economic woes — and may not praise him for the economy’s improvement. At the same time, Romney risks looking tin-eared if he goes around reminding people how bad they should feel — when they did feel bad for years.

Only one thing is certain: politicians of both parties can’t fix all problems, no matter what they pretend. Obama didn’t break the economy, nor did he fix it. Time — and markets’ ability to correct themselves — did that.

Nicole Gelinas is a contributing editor to the Manhattan Institute’s City Journal. Follow her on Twitter @nicolegelinas.