Introduction
Housing Industry is one of the largest industries of the United States, which has grown exponentially since World War II. The Marshal Plan for Europe expanded industrial base of the United States, and as a result, employment level increased (economy operated at full employment, which increased both wages and consumption). During this period, a large segment of American society preferred investing in homes (bought homes) and as the size of spending increased so did the size of the industry (World Atlas, 2012).
It is quite evident from the study of demand for the houses that Americans are willing to spend a substantial portion of their income on homes. As per statistics, Real Estate-Renting-Leasing makes 13% of the United States’ GDP, which aids us in understanding how large this industry is. As the size of the industry is extremely large; therefore, when real-estate bubble burst in 2007-8, the American economy went into recession (dubbed as The Great Recession). The sub-prime mortgage crisis lasted for almost four (4) years, during which investment, employment-level and inflation rate decreased drastically. As the size of the investment and inflation dwindled, so did the economic growth (Greiner, 2015).
To address economic challenges, yielded by the sub-prime mortgage crisis, the Federal Reserve and government devised and implemented expansionary monetary and fiscal policies, respectively. The objective of these policies or strategies was to increase the pace of GDP growth (intensify economic activity), by increasing 1) size of consumption and investment (Amadeo, 2018).
According to the statistics, the American economy is operating at full level, which has increased general price level. This economic recovery has also positively affected the housing industry, which has facilitated the recovery of the housing industry that had witnessed the decline in invest around 20% every year since 2009. The residential investment has increased in the last few years; however, the growth rate has fluctuated. There are numerous factors which have affected the fluctuation in investment, such as wages and changes in the value of homes during a particular period.
In this study, we intend to learn what affects the value of homes in a particular city/country. We will methodically review the literature to isolate to learn what affects the value of homes. After isolating that factor, we will retrieve data about that factor and apply statistical analysis.
Literature Review
Numerous studies claim that demand is strongly affected by changes in real income; when real income increases, demand for goods and services (aggregate consumption) increase and when real income decreases, the demand for goods and services increase. During the period of boom real income increases, given that an increase in nominal wages increase is greater than inflation. The increase in income directly affects the demand for preferred goods and services, which includes housing. Housing remains to be preferred good of most Americans, which is apparent from the size of the housing industry (13% of GDP). As the home is part of the American Dream; therefore, it is natural that a large segment of society prefers to spend its income on buying a house. Also, Americans use homes as an instrument or a mean to connect with a community. However, it is also a fact that millennial generation has a slightly different perception regarding home; through home ownership is still a major component of the American Dream and a large section of American society is willing to spend a substantial portion of their income on homes (Gallin, 2003).
When investment increases, during the period when the economy is operating at full level, real income also increases, which affects sales, prices, and values of home. In recent years, the American economy has performed well, which increased employment level to full employment. Simultaneously, there has been an increase in the sales of median homes, which reaffirms the correlation between employment and selling of homes. It is imperative to understand that only construction and sales of new homes affect current GDP (Kuttner, 2014).
Another factor which directly and strongly affects sales, and the value of homes, is long-term funds for the purchase of new and old homes. It is because buying a house, in the United States, is expensive because of excess demand for homes. Therefore, Americans prefer to buy a house through a bank (loan). When the supply of loans for the purchase of a home exceeds the demand for loans to purchase a house, the interest rate on loans dwindles (happened before the 2007 sub-prime mortgage crisis). This dwindling of the interest rate, on loans for the purchase of a home, increases the sale of new and old homes; thus, increasing the value of these homes (Dutta, 2017).
Studies reveal that in different parts of the United States housing industry is performing differently; the value of homes has increased variably since 2005. Numerous factors influence the value of homes. For instance, zoning policies directly affect the values of homes. Similarly, GDP of every city or state is different, which also affects the value of homes. Generally, it is GDP growth of cities (employment and consumption are its components) that affects the value of homes (Dutta, 2017).
Methodology
In this academic exercise, we will regress the GDP growth of selected 15 cities with their respective GDP. Data about the value of homes will be retrieved from the website provided (Washington Post).
Analysis
Correlation
| House Change 2004-2015 | GDP Change | |||
| House Change 2004-2015 | 1 | |||
| GDP Change | 0.236631 | 1 | ||
Interpretation and Conclusion
From the statistical analysis, we learned that the correlation between GDP growth and the change in the value of houses, from 2004-15, is very small; only 23%. From the regression test, we learn that the relationship between GDP growth and the change in the value of houses is insignificant. The results which we have obtained are faulty because the data is not healthy. We must have retrieved data about changes in the value of homes every year, of a particular city, and should have regressed it against annual change in GDP or GDP growth. Instead, we retrieved a single figure of change in the value of the house, in a particular city, and regressed it against the single figure of GDP growth of that city. Therefore, our results are faulty and must not be trusted. A more detailed study, based on healthy and valid empirical evidence, about our variable, would facilitate us in obtaining better or more reliable results.
Based on the systematic review of the literature about changes in price and value of homes, we can assert that GDP growth positively affects the values of homes most. However, there are other factors too, which affect the value of homes. For instance, rent controls directly affect the value of homes in those cities, where rent controls are effectively enforced. Similarly, zoning policy is another factor which affects the value of homes.
We have also learned that in different parts of a city, the value of homes is different, which implies that factors other than GDP growth/real income affect the value and prices of homes.
Recommendations
- Collection of valid and healthy empirical evidence (data)
- Development of Panel Data to understand how GDP growth affects the value of homes in different cities
- Use of multiple regression analysis with GDP growth as independent variable and change in the value of homes as the dependent
References
Amadeo, K. (2018, June 30). Subprime Mortgage Crisis, Its Timeline and Effect. Retrieved from https://www.thebalance.com/subprime-mortgage-crisis-effect-and-timeline-3305745
Dutta, N. (2017, December 5). Housing Market’s Comeback Is Poised to Accelerate. Retrieved from https://www.bloomberg.com/view/articles/2017-12-05/housing-market-s-comeback-is-poised-to-accelerate
Gallin, J. (2003, April). The long‐run relationship between house prices and income: evidence from local housing markets. Retrieved from http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.505.9411&rep=rep1&type=pdf
Greiner, B. (2015, August 20). There’s No Place Like Home – The Housing Market And Economic Growth. Retrieved from https://www.forbes.com/sites/billgreiner/2015/08/20/theres-no-place-like-home-the-housing-market-and-economic-growth/#36ee58417404
Kuttner, K. V. (2014). Low interest rates and housing bubbles: still no smoking gun. The Role of Central Banks in Financial Stability: How Has It Changed? (pp. 1-27). Department of Economics, Williams College.
World Atlas. (2012, December 31). The Biggest Industries in the United States. Retrieved from https://www.worldatlas.com/articles/which-are-the-biggest-industries-in-the-united-states.html
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