THE HOUSING MARKET
If Obama had lost reelection, it’s no exaggeration to say that his housing policy could have been the No. 1 reason.
Recent economic research is clear on one thing: The housing-market crash didn’t just help trigger the recession; it also waylaid the recovery. Plummeting home values pushed Americans to save more and spend less than they did in the years running up to the recession—sound practices over the long run, but poor prescriptions for a quick snap-back in the economy. Loss of home equity also robbed small-business owners, and prospective ones, of the ability to borrow against their houses to expand or start companies. Construction employment remains 2 million workers below its precrisis peak.
For three years, Obama’s housing efforts did little to reverse that tide. Only in the last year did he switch course, pressing—often in vain—for more-aggressive actions to write down home loans and spur more refinancing at rock-bottom interest rates. Meanwhile, the market sank like a rock, then, sometime in fall 2011, finally hit what appears to have been the bottom.
Now, economists at the real-estate website Zillow have seen four consecutive quarters of rising prices. If you look at just nondistressed properties and exclude foreclosed homes sold at a steep discount, you’ll see that housing values are down about 20 percent from theirpeak, which is up 4 percentage points from last year’s trough. The rebound should cool just a touch next year, but prices will continue to rise, Zillow predicts. “We’re seeing what we think is a durable recovery,” says Stan Humphries, Zillow’s chief economist. “What the second quarter of this year actually showed us is that the housing market has some strength of its own independent of the broader economy”—because even when growth stalled broadly, housing prices kept rising.
This is huge news for the economy overall, and it’s possible that lawmakers and federal agencies could make it even better. Edward DeMarco, the acting head of the Federal Housing Finance Agency, has thwarted much of Obama’s new, more aggressive housing agenda. If the president replaces him with a friendlier director, some economists say, the ensuing policies would boost the market and the economy overall fairly quickly.
Lawmakers could also slam the brakes on the housing resurgence if they push too hard, too fast, to reduce the government’s outsized role in the market. A tax-reform bill that limits or kills the mortgage-interest deduction would ripple into prices if it isn’t phased in. Likewise, Congress will need to strike a balance in transitioning the mortgage market away from its heavy reliance on public guarantees; at present, government-sponsored entities such as Fannie Mae back nine in 10 new mortgages. The government needs to reduce that level, but not so fast as to disrupt the recovery.
High and volatile oil prices are not a glitch—they’re the future. China’s demand will continue to rise over time; global-supply increases, even with a U.S. boom in unconventional extraction, won’t keep pace. And neither the White House nor Congress can do much to stop that. Gasoline-price spikes tripped the recovery up a couple of times during Obama’s first term. Ironically, the next few years might not bring as much volatility, industry analysts predict, because the slowdowns in Europe and China have depressed demand a bit.
Lawmakers aren’t just trying to cast away economic anchors in the next four years. They also have the opportunity to fuel growth. Expansionary fiscal policy would be ideal in the short term, but it seems unlikely to get through Congress anytime soon, so the next-best scenario probably lies in a series of bipartisan agreements to improve and streamline the role of the federal government.
You wouldn’t have known it from their debates and television ads, but Obama and Romney laid the groundwork for some meaningful, pro-growth, bipartisan compromises in the course of the campaign. Nearly all of the possibilities are rooted in changing the government—how it taxes, how it spends, and how it regulates—to improve economic efficiency.
For starters, both Romney and Obama promoted some version of corporate and individual tax reform. A wide swath of economists agree that the tax code has grown so complex as to be distortional, diverting investment from more productive sectors of the economy to less productive ones. Its myriad loopholes encourage businesses, instead of hiring workers or buying new software, to spend billions of dollars on what economists call “rent-seeking”—influence-peddling that seeks to bend the code (or federal regulation or spending) to favor some companies over others. “The body politic can’t agree on much,” says Matthew Mitchell, an economist at George Mason University who has written extensively on so-called crony capitalism. “But it seems like—at least, in principle—there ought to be bipartisan support for cutting spending that benefits the wealthy and well connected.”