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Introduction to U.S. Economy: Housing Market
The Housing Market
Housing and the Broader Economy
Real estate and the housing market play an important role in
The housing market is incorporated into gross domestic
the U.S. economy. At the individual level, roughly 65% of
product (GDP), the prominent measure of economic
households are owner occupied, homes are often a
activity, in two ways. First, GDP includes all spending on
substantial source of household wealth in the United States,
the construction of new single- and multi-family structures,
and housing construction provides widespread employment.
residential remodeling, and brokers’ fees, which is referred
At the aggregate level, the housing market accounts for a
to as residential fixed investment. As of 2018, spending on
significant portion of all economic activity, and changes in
residential fixed investment was about $785 billion,
the housing market can have broader effects on the
accounting for about 3.3% of GDP. Second, GDP includes
economy.
all spending on housing services, which includes renters’
rents and utilities and homeowners’ imputed rent and utility
Household Net Worth
payments. As of 2018, spending on housing services was
Purchasing a home is often one of the largest investments
about $2.6 trillion, accounting for 11.6% of GDP. Taken
individuals make. Home ownership accounts for a
together, spending within the housing market accounted for
significant portion of households’ net worth in the United
nearly 15% of GDP in 2018.
States. As of 2018, owner-occupied real estate accounted
for about a quarter of households’ net worth, according to
Figure 2. Total Spending in Housing Market
Federal Reserve data. As shown in Figure 1, the share of
As a percentage of GDP
households’ net worth arising from their home has been
relatively stable over the past several years, after declining
significantly following the 2007-2009 recession.
Figure 1. Home Value as a Percentage of Net Worth
Source: Bureau of Economic Analysis, National Income and Product
Accounts, Table 1.1.5, and Table 2.3.5.
Source: Federal Reserve, Financial Accounts of the United States,
As shown in Figure 2, housing’s share of economic output
Table B.101.H Balance Sheet of Households.
was generally on the rise between 1947 and 2005. Between
2000 and 2005, residential investment grew rapidly before
Notes: Total net worth of households measures assets less liabilities.
declining even more rapidly as the housing bubble burst.
Home value is measured as the market value of owner-occupied real
Residential investment remained well below its peak, both
estate, including vacant land and mobile homes.
in real terms and as a percentage of GDP. Spending on
Employment
housing services continued to rise as a percentage of GDP
through this period, however.
Residential construction is a significant industry in the
United States, and it employs a large number of people. At
Housing’s Indirect Impact on the Economy
the peak of the housing market bubble, residential
The housing market plays an important role in the broader
construction employed more than 1 million individuals.
economy as well, as evinced by the housing bubble causing
However, as a result of the housing bubble bursting and
the deepest and longest recession since the Great
subsequent recession, employment fell to a low of about
Depression. Housing prices can impact residential
560,000 employees in 2011. Since then, employment has
investment and therefore affect economic growth. Rising
picked up in this industry to about 832,000 in 2019,
home prices likely encourage additional construction
according Bureau of Labor Statistics data.
spending to take advantage of higher prices, leading to
more robust economic growth. A decline in housing prices
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Introduction to U.S. Economy: Housing Market
is likely to depress construction spending, leading to more
Housing prices are an indicator of the broad health of the
anemic economic growth.
housing market and have important implications for the
economy as a whole, as discussed earlier. As shown in
Fluctuations in the housing market, particularly housing
Figure 3, after falling significantly during the 2007-2009
prices, can have broader effects on the economy, through
recession, average nominal housing prices have been
so-called wealth effects. An increase in housing value
increasing nationally each year since the beginning of 2012,
encourages homeowners to spend more than they do at
surpassing their previous nominal peak in the first quarter
other times for a variety of reasons, including higher
of 2016. Growth in housing prices peaked in the first
confidence in the economy, increased equity for
quarter of 2018, and it has slowed each quarter since this
homeowners to borrow against, and higher rental income. A
peak.
decrease in prices results in the opposite. In the United
States, consumer spending makes up roughly 70% of the
Another common indicator of the health of the housing
economy, therefore changes in housing wealth can result in
market is home sales. Increasing home sales is generally
significant changes in economic growth.
viewed as a sign of a strong housing market, and a strong
economy, as it suggests individuals have both the income to
Monetary Policy and the Housing Market
make the purchase and a positive economic outlook. By
Federal Reserve decisions may also affect the housing
contrast, when the economy is performing poorly,
market through the cost of financing a home purchase. Most
individuals are less likely to make major purchases as their
Americans take out a mortgage to purchase a home, and
income will likely grow slower or they are more concerned
mortgage debt accounts for about 70% of all household
about losing their current job. As shown in Figure 4, during
debt. The interest rate associated with a mortgage is
the 2007-2009 recession, housing sales fell dramatically.
partially determined by the supply and demand for loanable
Housing sales began to recover in 2011 and 2012, but sales
funds; however, the Federal Reserve can also influence
have still not recovered to pre-recession levels. In 2018,
mortgage interest rates by adjusting its benchmark interest
sales of existing houses fell by about 3.1%, whereas sales of
rate, the federal funds rate. When the Federal Reserve
new houses increased by about 1.5%.
decides to increase the federal funds rate, it puts upward
pressure on mortgage interest rates as well. Higher
Figure 4. Annual House Sales
mortgage interest rates increase the overall cost of
In thousands
purchasing a home, by increasing mortgage payments. The
opposite occurs when the Federal Reserve lowers the
federal funds rate. During the 2007-2009 recession, the
Federal Reserve purposely tried to decrease mortgage
interest rates more directly by purchasing mortgage-backed
securities in an effort to buoy the housing market following
the housing bubble bursting.
Housing Market Conditions
A number of broad indicators are used to assess the housing
market. These national indicators may not capture
idiosyncrasies in regional or local housing markets.
Figure 3. Nominal Housing Prices
Year-over-year change
Source: Housing and Urban Development, U.S. Housing Market
Conditions, https://www.huduser.gov/portal/ushmc/
quarterly_commentary.html#undefined.
Residential investment, shown as a percentage of GDP in
Figure 2, is also used as a measure of the health of the
housing market. If demand for housing declines or
economic actors expect the housing market to weaken,
residential investment is likely to slow or decline, and vice
versa. Residential investment peaked in 2005 at about $884
billion (in 2012 dollars), before falling significantly
following the housing bubble to about $382 billion (in 2012
dollars) in 2011. Residential investment has yet to recover
to this previous peak. Residential investment began
growing again in 2012, increasing by about 13%; however,
growth has generally slowed in subsequent years and
Source: FHFA, House Price Indexes, Seasonal y Adjusted Purchase-
declined by 1.5% in 2018.
Only Index, https://www.fhfa.gov/DataTools/Downloads/Pages
/House-Price-Index-Datasets.aspx#qpo.
Jeffrey M. Stupak, Analyst in Macroeconomic Policy
Note: Figure presents change in nominal housing prices on a year-
over-year basis.
IF11327
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Introduction to U.S. Economy: Housing Market
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