To see why the housing market matters so much, let me introduce you to the typical American worker. He or she is 35 to 44 years old and has less education than you probably realize, with some exposure to college but without even a two-year degree. These folks have seen a decline in real wages since President George W. Bush took office. Between 2000 and 2004, real earnings for such workers fell by 2.4%, or about $1,100 a year. That's why many Democrats think that they should be doing better in the polls.
But wait. The typical American also owns a house. Home-ownership climbed from 67% in 2000 to 69% today. Toss a wad of paper into a crowd, and you are likely to hit someone who is paying a mortgage or grousing about real estate taxes. For these people, declining wages are less important than low interest rates and rising home prices. Let's run some numbers.
In 2000 the average interest rate for a new 30-year mortgage was about 8%. From 2003 to 2005, however, a homeowner could easily get a 30-year rate of less than 6%, well below the lowest rates available in the 1990s. As a result, almost everyone could cut the interest costs by refinancing. For example, if you had a $150,000 mortgage at 8% in 2000 and refinanced to a 6% mortgage in 2005, your interest payments on your house would have dropped by roughly $3,000 a year.
Thus, many Americans may be seeing a pretax gain from the lower interest payments that more than compensates for the decline in wages. And we haven't yet factored in soaring home values, up about 33% over the past five years, after adjusting for inflation. No wonder most voters, while worried, still haven't turned totally pessimistic.
That's why the Democratic response to a housing slump, especially if the bottom falls out of the U.S. market, could be politically crucial. What could the party offer? Democrats could start thinking about ways to ease the country's bankruptcy laws to help homeowners whose house values have dropped sharply, suggests Kashif Mansori, an economist at Colby College in Waterville, Me., who is one of the main posters on the liberal blog Angry Bear (angrybear.blogspot.com). Another possibility, he notes, is "more favorable tax treatment for people who have suffered capital losses on their house."
By contrast, Robert Atkinson, vice-president of the Progressive Policy Institute, the research arm of the centrist Democratic Leadership Council, wouldn't try to cushion a bust. Instead, with a lot of people currently locked out of the market by extremely high prices, says Atkinson, "I would figure out how to reduce barriers, especially zoning and planning restrictions, that keep more homes from being built."
Of course, Republicans won't be standing still in the event of a housing downturn. The Bush Administration is likely to push even harder for tax cuts to help Americans who can no longer draw on their home equity. After the boom is history, political supremacy in Washington may well depend on which party can best reassure the worried American homeowner. By Michael Mandel