Introduction to U.S. Economy: Housing Market

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Updated January 13, 2025

Introduction to U.S. Economy: Housing Market

The Housing Market

Real estate and the housing market play an important role in the U.S. economy. At the individual level, roughly 65% of occupied housing units are owner occupied, homes are often a substantial source of household wealth in the United States, and housing construction provides widespread employment. At the aggregate level, housing accounts for a significant portion of all economic activity, and changes in the housing market can have broader effects on the economy.

Household Net Worth Purchasing a home is often one of the largest investments an individual makes. Home ownership accounts for a significant portion of households’ net worth in the United States. As of 2023, 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 homes 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 the peak of the housing market bubble in 2006, residential construction employed more than 1 million individuals. However, as a result of the housing bubble bursting and subsequent recession, employment fell to a low of about 560,000 employees in May 2011. Since then, employment has picked up in this industry (apart from a brief decline during the 2020 recession) and reached about 958,000 by November 2024, according Bureau of Labor Statistics data.

Housing and the Broader Economy

The housing market is incorporated into gross domestic product (GDP), the predominant measure of economic activity, in two ways. First, GDP includes all spending on the construction of new single- and multi-family structures, residential remodeling, and brokers’ fees, which is referred to as residential fixed investment. As of 2023, spending on residential fixed investment was about $1.1 trillion, accounting for about 4.0% of GDP. Second, GDP includes all spending on housing services, which includes renters’ rents and utilities and homeowners’ imputed rent and utility payments. As of 2023, spending on housing services was about $3.3 trillion, accounting for 12.1% of GDP. Taken together, spending within the housing market accounted for 16.1% of GDP in 2023.

As shown in Figure 1, housing’s share of GDP has generally trended upward, with the notable exception of the housing market crash in 2007. Between 2000 and 2005, residential investment grew rapidly before declining even

more rapidly as the housing bubble burst. Since then, residential investment has remained well below its peak both in dollar terms and as a percentage of GDP. Housing’s share of GDP decreased each year since the COVID-19 pandemic began in 2020 but remains above levels seen during the 2007 crash.

Figure 1. Total Spending in Housing Market As a Percentage of GDP

Source: Bureau of Economic Analysis, National Income and Product Accounts, Table 1.1.5 and Table 2.3.5.

Housing’s Indirect Impact on the Economy The housing market can play an important role in the broader economy as well, as evidenced by the housing bubble that precipitated the recession of 2007-2009. Housing prices can impact residential investment and therefore affect economic growth. Rising home prices likely encourage additional construction spending to take advantage of higher prices, leading to more robust economic growth. A decline in housing prices is likely to depress construction spending, leading to more anemic economic growth.

Fluctuations in the housing market, particularly housing prices, can have broader effects on the economy through so- called wealth effects. An increase in housing value encourages homeowners to spend more than they do at other times for a variety of reasons, including higher confidence in the economy, increased home equity for homeowners to borrow against, and higher rental income. A decrease in prices results in the opposite. In the United States, consumer spending makes up roughly 70% of the economy. Therefore, changes in housing wealth can result in significant changes in economic growth.

Monetary Policy and the Housing Market Federal Reserve decisions may also affect the housing market through the cost of financing a home purchase. Most

Introduction to U.S. Economy: Housing Market

https://crsreports.congress.gov

Americans take out mortgages to purchase homes. The interest rate associated with a mortgage is partially determined by the supply and demand for loanable funds. However, the Federal Reserve can also influence mortgage interest rates by adjusting its benchmark interest rate, the federal funds rate. When the Federal Reserve decides to increase the federal funds rate, it puts upward pressure on mortgage interest rates as well. Higher mortgage interest rates increase the overall cost of purchasing a home by increasing mortgage payments. During the 2007-2009 recession and the COVID-19 pandemic, the Federal Reserve purposely tried to decrease mortgage interest rates more directly by purchasing mortgage-backed securities. Thirty-year mortgage rates temporarily dropped below 3% in 2020 but more than doubled since then as the Federal Reserve increased interest rates and let securities roll off its balance sheet. Despite recent rate cuts, the 30-year mortgage rate remains above 6% as of mid-December 2024.

Housing Market Conditions

A number of broad indicators are used to assess the housing market. National indicators do not necessarily capture the variation among local markets and, therefore, may not be indicative of any one specific locality.

Figure 2. Nominal Housing Prices Year-over-Year Change

Source: Federal Housing Finance Agency, House Price Indexes, Seasonally Adjusted Purchase-Only Index.

Housing prices are an indicator of the housing market’s conditions and have important implications for the economy as a whole. As shown in Figure 2, after falling significantly during the 2007-2009 recession, average nominal housing prices have been increasing nationally each year since the beginning of 2012, surpassing their previous nominal peak in the first quarter of 2016. After rapid growth in housing prices in 2020, growth slowed to rates comparable to 2012-2019 growth rates.

Another common indicator of the health of the housing market is home sales. An increase in home sales is generally viewed as a sign of a strong housing market and a strong economy, as it suggests that individuals have both the income to make the purchases and a positive economic outlook. As shown in Figure 3, during the 2007-2009 recession, home sales fell dramatically. Home sales began to recover in 2011 and 2012 but have still not recovered to pre-recession levels. In 2023, sales of existing houses

increased by 4.2% while sales of new houses decreased by 18.7%.

Figure 3. Annual House Sales In Thousands

Source: Department of Housing and Urban Development, U.S. Housing Market Conditions.

Residential investment, shown as a percentage of GDP in Figure 1, 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. In nominal dollar terms, residential investment hit a relative peak in 2006 before falling significantly following the housing bubble of 2007; 2006 levels were not surpassed until 2020.

Finally, housing inventory (the supply of housing available for sale) is often used to assess housing market conditions. A low inventory generally leads to upward pressure on house prices. Housing inventory has been relatively low for the past decade, as shown in Figure 4.

Figure 4. Housing Inventory

Source: Department of Housing and Urban Development, U.S. Housing Market Conditions.

CRS Resources

CRS In Focus IF12048, High Home Prices: Contributing Factors and Policy Considerations, by Mark P. Keightley and Lida R. Weinstock.

(Note: This In Focus was originally authored by Jeffrey Stupak, former CRS Analyst in Macroeconomic Policy.)

Lida R. Weinstock, Analyst Macroeconomic Policy

IF11327

Introduction to U.S. Economy: Housing Market

https://crsreports.congress.gov | IF11327 · VERSION 11 · UPDATED

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