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Updated May 3, 2021
Introduction to U.S. Economy: Housing Market
The Housing Market
residential investment has remained well below its peak
Real estate and the housing market play an important role in
both in real terms and as a percentage of GDP. Despite a
the U.S. economy. At the individual level, roughly 65% of
steep drop in total housing spending, both in real terms and
occupied housing units are owner occupied, homes are
as a percentage of GDP, s pending on housing services
often a substantial source of household wealth in the United
continued to rise as a percentage of GDP through this
States, and housing construction provides widespread
period. Housing’s share of GDP has still not reached its
employment. At the aggregate level, housing accounts for a
2005 peak.
significant portion of all economic activity, and changes in
the housing market can have broader effects on the
Figure 1. Total Spending in Housing Market
economy.
As a percentage of GDP
Household Net Worth
Purchasing a home is often one of the largest investments
individuals make. Home ownership accounts for a
significant portion of households’ net worth in the United
States. As of October 2020, owner-occupied real estate
accounted for slightly more than a quarter of households’
net worth, according to Federal Reserve data. The share of
households’ net worth arising from their home has been
relatively stable over the past several years, after declining
significantly following the 2007-2009 recession.
Employment
Residential construction is a significant industry in the
United States, and it employs a large number of people. At
Source: Bureau of Economic Analysis, National Income and Product
the peak of the housing market bubble in 2006, residential
Accounts, Table 1.1.5, and Table 2.3.5.
construction employed more than 1 million individuals.
However, as a result of the housing bubble bursting and
Housing’s Indirect Impact on the Economy
subsequent recession, employment fell to a low of about
The housing market can play an important role in the
560,000 employees in May 2011. Since then, employment
broader economy as well, as evidenced by the housing
has picked up in this industry and reached about 872,000 by
bubble that precipitated the recession of 2007-2009.
March 2021, according Bureau of Labor Statistics data.
Housing prices can impact residential investment and
therefore affect economic growth. Rising home prices likely
Housing and the Broader Economy
encourage additional construction spending to take
The housing market is incorporated into gross domestic
advantage of higher prices, leading to more robust
product (GDP), the prominent measure of economic
economic growth. A decline in housing prices is likely to
activity, in two ways. First, GDP includes all spending on
depress construction spending, leading to more anemic
the construction of new single- and multi-family structures,
economic growth.
residential remodeling, and brokers’ fees, which is referred
to as residential fixed investment. As of 2020, spending on
Fluctuations in the housing market, particularly housing
residential fixed investment was about $885 billion,
prices, can have broader effects on the economy through so-
accounting for about 4.2% of GDP. Second, GDP includes
called wealth effects. An increase in housing value
all spending on housing services, which includes renters’
encourages homeowners to spend more than they do at
rents and utilities and homeowners’ imputed rent and utility
other times for a variety of reasons, including higher
payments. As of 2020, spending on housing services was
confidence in the economy, increased home equity for
about $2.8 trillion, accounting for 13.3% of GDP. Taken
homeowners to borrow against, and higher rental income. A
together, spending within the housing market accounted for
decrease in prices results in the opposite. In the United
17.5% of GDP in 2020.
States, consumer spending makes up roughly 70% of the
economy; therefore, changes in housing wealth can result in
As shown in Figure 1, housing’s share of GDP has
significant changes in economic growth.
generally trended upwards, with the notable exception of
the housing market crash in 2007. Between 2000 and 2005,
Monetary Policy and the Housing Market
residential investment grew rapidly before declining even
Federal Reserve decisions may also affect the housing
more rapidly as the housing bubble burst. Since then,
market through the cost of financing a home purchase. Most
Americans take out a mortgage to purchase a home, and
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