Q: Did electing a Democratic Congress in 2006 really lead to increased unemployment, higher gas prices and more home foreclosures?
A: No, and most of the figures in a widely-circulated e-mail are made up. In fact, the entire premise of the e-mail is a logical fallacy.
I received this by e-mail and I’ve also seen it posted as a comment on a lot of blogs and news sites. Is there any truth to it?
You Want Change?
A little over one year ago:
1) Consumer confidence stood at a 2 1/2 year high;
2) Regular gasoline sold for $2.19 a gallon;
3) the unemployment rate was 4.5%.
Since voting in a Democratic Congress in 2006 we’re [sic] seen:
1) Consumer confidence plummet;
2) the cost of regular gasoline soar to over $3 a gallon;
3) Unemployment is up to 5% (a 10% increase);
4) American households have seen $2.3 trillion in equity value evaporate (stock and mutual fund losses);
5) Americans have seen their home equity drop by $1.2 trillion dollars;
6) 1% of American homes are in foreclosure.
America voted for change in 2006, and we got it!
Like most of the chain e-mails making the rounds, this one is inaccurate. Some claims are outright false while others are grossly out of context. Overall, the e-mail commits the logical fallacy known as post hoc ergo propter hoc (or after the fact, therefore because of the fact).
Here’s what we found:
- Consumer confidence has fallen since October 2006, but it was not at a 2 1/2 year high prior to the elections. In fact, consumer confidence varies less with elections than it does with general economic conditions, many of which have little to do with the actions of politicians.
- Gas prices were not at $2.19 per gallon before the election, but did reach that point nearly a year before the election and again (briefly) two months afterward.
- The e-mail actually understates the equity drop by $500 billion. In fact, the stock market lost $2.8 trillion in equity from its most recent high point. But the e-mail fails to make clear that the high point happened nearly a full year after the election. It also neglects to mention that the market is higher now than it was in November 2006.
- There’s no clear figure on how much home equity has been lost since 2006 (the two most widely used measures give vastly different sums). But home equity loss and higher foreclosures have more to do with some unsavory lending practices and some bad decisions by homebuyers than they do with congressional activities.
- The e-mail commits a whole series of post-hoc fallacies. That is, it assumes, without offering any evidence, that because one thing preceded another, the first must have caused the second.
We did find one accurate assertion, though. The unemployment rate really did increase from 4.5 to 5 percent.
My Kingdom for a House!
The e-mail is right about the bare facts of the housing crisis. It’s true that about 1 percent of American homes were in some stage of foreclosure in 2007, and for the first time since 1945, home equity value fell below 50 percent (that is, Americans’ mortgages are more than half the value of their homes).
Whether Americans have actually lost $1.2 trillion in home equity depends on what measure one uses. There are two different indexes used to track home value. Standard & Poor’s Case-Schiller Home Price Index measures residential housing prices in 20 metropolitan regions and then constructs a composite index for the entire United States. Freddie Mac’s Conventional Mortgage Home Price Index (or CMHPI) measures the value of single family homes that qualify for Freddie Mac or Fannie Mae underwritten mortgages, which, in practical terms, means that the CMHPI excludes any house valued at more than $417,000.
Measured by the Case-Schiller index, the crisis is actually worse than the e-mail says, at least for homes in those 20 regions. Case-Schiller shows a 12 percent decline in home value since November 2006. Standard & Poor’s estimated the 2006 value of residential real estate held by individuals and nonprofits to be around $22.4 trillion. A 12 percent decline works out to about $2.7 trillion in lost home equity.
The CMHPI paints a very different picture. Its U.S. index, which is given in quarterly rather than monthly figures, shows a fourth quarter 2006 composite of 294.5 and a fourth quarter 2007 (the last quarter available) of 295.3, or about three-tenths of a percent increase.
The truth lies somewhere in between. As this map of foreclosure rates shows, many of the areas hardest hit by falling home prices are large, high-growth areas – in other words, major metropolitan areas where a lot of homes are priced at more than $417,000:
Because the Case-Schiller index focuses on some of the metropolitan areas hardest hit, it likely overstates the amount of equity lost. By excluding homes valued at more than $417,000, the CMHPI understates the problem.
In any event, the e-mail is wrong to imply that the crunch is related to congressional elections. Indeed, blame really rests with two entirely different groups: lenders who (in some cases) fudged loan applications for buyers who weren’t really qualified for loans, and home buyers who signed mortgages that they couldn’t afford. Operating on the assumption that houses would always increase in value, some Americans essentially gambled on their home purchases. They were aided, in many cases, by subprime loans which generally have very low interest rates for a few years, but which later jump higher – sometimes much higher – than rates for conventional mortgages. Many people used subprime loans to buy houses that they could afford (barely) for the first few years with the thought that they could always sell the house for a handsome profit just before the higher interest rates (and hence higher payments) kicked in.
Unfortunately, house prices didn’t continue to rise. In fact, the frenzy to purchase houses resulted in unrealistically high prices – much like the stock market bubble in the late 1990s. And so, like that stock market bubble, when investors stepped back for a moment, they realized that they were overpaying. Since houses (like everything else) are worth only what someone is willing to pay for them, when new home buyers paused, housing prices leveled out and then began to decline, falling 8.9 percent in 2007. Many homeowners thus found themselves with the double whammy of a house that was worth less money than they owed and an increased payment that they could not afford.
The e-mail is a classic example of the logical fallacy post hoc ergo propter hoc. Post hoc fallacies assert that A caused B because B happened after A without offering any evidence that A and B are causally related. It’s one of the most common fallacies, and not just in the political arena, either. They’re very easy to construct: Just pick two things you don’t like and attribute the second one to the first. It’s that sort of thinking that might lead a sports fan to believe that his team wins only when he wears his "lucky" cap turned backward.
A simple rule of thumb is to treat any sort of "we did this and some really bad thing happened" argument with extreme skepticism. Causal arguments work only if there is an actual connection between the two events. A good argument can’t just assume a connection; it has to show that one really exists. In case you want to delve further into this subject, we’d suggest you visit our sister site for educators and students, FactCheckED.org, and take a look at the lesson plan "Monty Python and the Quest for the Perfect Fallacy."
When you see this sort of claim presented without any evidence at all, you probably ought to just assume it’s false. And if that claim happens to arrive in the form of a chain e-mail? Then we hope you’ll take our advice and give your delete key some exercise.
– Joe Miller
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