I know that it is conventional wisdom that we are in a "housing crisis" because house prices have fallen recently, but has no one noticed that this relatively modest drop came after a much greater inflation?

After hearing the newscasters repeatedly telling me how there was a "dramatic" 9% drop in housing prices last year, I started asking myself, "exactly how much did housing prices rise in the past 10 years?" I seem to recall that houses in my area ran between $100,000 and $300,000 in the late 1990's, and now, even after the "crash" are running between $500,000 and $900,000, and appear to still be selling, though at a reduced rate*. So, I asked myself, if there is such a crisis, how much did a home buyer lose?

Well,a bit of quick research showed me that it all depends on when you bought. If a home buyer picked up a house in the past year, it appears he lost, depending on his location, up to 13% of the house's value. On the other hand, some areas actually saw an increase of as much as 23%. So, even for those who bought houses recently there were some who did not suffer a "crisis".

If we push out the time horizon more, we see even less of a crisis. In the nearly 400 metro regions for which I have numbers, there was not one showing a loss over 3 or 5 years. Yes, the heady double digit appreciation of the past is gone, but people who bought and held properties still made a decent, if not spectacular, profit.

So, why all the talk of crisis? I think there are four major reasons for the talk of crisis. (One other less obvious reason will be discussed later.)

First, the drop in values, like the prior inflation of prices, struck particularly strongly in the Washington, New York, and LA areas, in other words, in those places inhabited by the media trend setters. And, as we well know, any crisis which strikes LA, NYC, or DC will become a "nationwide crisis" in the news. So, location definitely has something to do with it.

Second, a crisis sells better than a minor adjustment. Papers and ad time are not sold with bland tales, so the news has a habit of exaggerating every tale of woe, if only to grab a few more ratings points. The housing crisis is just an extension of the old "if it bleeds, it leads" rule to economic matters.

Third, we have all become used to having constant housing inflation. Whole industries sprung up centered on "flipping houses", most of which benefit more from constant price inflation rather than from the cosmetic repairs done. Many are also used to being able to take out ever increasing home equity loans, extracting value as the paper value of their house increases. In short, continual housing inflation had become a part of our lives, and we were not ready for it to end.

Last, we must recognize that the party in the White House has a small role in this "crisis". Just as Bush had unemployment "soar to 5%" while Clinton "reduced unemployment to a record 5%", I have doubts that this would be quite as much of a "crisis" were a different occupant in the White House.

Now, none of this is to say that there is no problem. Some people did suffer from the drop in housing prices. A few suffered simply by choosing, through no fault of their own, to buy a house at the wrong time. Far more suffered by banking on the continued inflation of housing prices, that is, they bet and lost. And still others suffered because they were foolish enough to bank on both low rates and high prices continuing forever, locking themselves into ARMs and other bad schemes.

Whatever the cause for the suffering some have experienced, I only want to point out that they remain a minority, and a small one at that.  Provided you did not purchase a house in the last year and did not try to take out home equity loans close to the full value of your house, you may never have noticed this "crisis" but for the constant howling of the media**. Most people have exercised fiscal restraint, have not swapped houses every year or two, have not over-extended themselves through home equity loans, and did not gamble on risky ARMs for financing. Yes a few otherwise prudent people also got harmed, but, again, that does not make a crisis. A few sad tales is a shame, but not a crisis. And certainly not a reason for the government to get involved.

Of course, THAT is the real reason for all the talk of crisis, more than any of the four reasons I gave above. The reason underneath all of the talk of crisis is that it is an election year and something bad happened. Never missing a chance to buy votes at the expense of tax payers, politicians at every level have latched on to the recent drop in prices and come forward with scheme after scheme to bail out everyone who suffered even the smallest inconvenience. To hear them talk, they will be giving us all limitless wealth if only they can have our vote. Again and again they shout "crisis" and then argue about how many dollars to throw at the problem.

All of which provides me with a convenient definition of a crisis: A crisis is an event which would otherwise pass unnoticed, but which occurs during an election year when a Republican sits in the White House***.

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* Admittedly, this is anecdotal evidence. Still, I doubt anyone can argue that houses today, even after the "crash" are selling for anything close to as low as the prices in 2000 or 2001.

** In fact, I have been involved as both buyer and seller in the housing market very recently, yet, as I have avoided ARMs and other bad financing decisions, I have not seen any harm (other than slightly more realistic prices) from the ongoing "crisis".

*** This difference between a crisis and an economic adjustment is similar to the difference between a "scandal" and a "witch hunt". I leave it to the reader to figure which party goes with which description.