Study: Falling Home Prices A Huge Economic Drag

A story at Bloomberg News on Wednesday morning caught the eye of the editorial team here at HW — a new joint study from senior researchers at both the USC Lusk Center for Real Estate and the UCLA Ziman Center for Real Estate takes a look at housing wealth effects on personal consumption. The study is telling, in particular, because it finds strong evidence not only of housing’s critical role in pumping up GDP during the recent boom years — but also suggests just how painful the downward pull of falling home prices really will be to the nation’s economy going forward. It finds empirical evidence that the effects of housing wealth, either through gain or loss, far trump the more traditional effects of “financial wealth” gained via the nation’s equity and broader financial markets. In particular, the study’s authors find that a 10 percent decline in housing wealth equates to a $105 billion, or 1.2 percent, reduction in personal spending. In fact, the analysis finds that the effect of changes in housing wealth on personal consumption spending are three times greater than changes in more general financial wealth. “Even if the stock market were to unexpectedly bounce back over the near term, those effects could be potentially offset due to ongoing declines in house values,” Stuart Gabriel, one of the study’s authors and director of the UCLA Ziman Center, told Bloomberg in an interview. “For every 10 percent decline in house prices nationally, our study suggests a 1 percentage point decline in real GDP growth.” Fitch Ratings estimated on Oct. 22 that home prices nationally will fall another 10 percent from current levels over the course of the next few quarters; if the research is correct, that decline could pull a full percentage point off of GDP growth. With the U.S. headed into what some economists see as a prolonged recession, more than a few have suggested, correctly, that housing’s recovery will be critical to the nation’s financial markets’ more normal functioning; the research study suggests that the nation’s real economy may depend more on housing than most economist might have previously thought. (Remember when the subprime mortgage crisis cropped up, and was initially discounted as being too small a factor in GDP to matter?) The study estimates that growth in real estate wealth due to an unsustainable real estate bubble contributed a whopping 12.25 percent of the growth in personal consumption expenditures observed by the Federal Reserve between the start of 2001 and through the third quarter of 2005. In contrast, stock gains contributed just 1.5 percent in growth to PCE — underscoring the shift in American consumption and investment away from the stock market after the dot-com collapse. But that shift from one asset class to another is now likely to make housing’s ride to the bottom that much more painful for the economy, the study suggests. The paper is a working paper available on the Lusk Center’s website; Bloomberg News reported that it is scheduled for publication next year in Regional Science and Urban Economics. Write to Paul Jackson at

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