I serve on the board of editors of Regional Science and Urban Economics. Papers published in RSUE are usually quite good but they rarely make the national news. The Mankiw and Weil paper from long ago arguing that the aging of the baby boomers would lead to falling home prices was an exception. But perhaps, here is a new one by colleage Stuart Gabriel and our USC friends.
Who says that UCLA and USC are rivals? We are all working together to make LA great.
U.S. Growth Will Be Hurt More by Homes Than Stocks, Study Says
By Daniel Taub
Oct. 29 (Bloomberg) -- Plunging home prices will cut economic growth in the U.S. more than the drop in stock prices this year, economists at the University of Southern California and the University of California, Los Angeles, said.
A 10 percent decline in housing wealth results in a $105 billion, or 1.2 percent, reduction in personal spending, according to the three-year study by economists at the USC Lusk Center for Real Estate and the UCLA Ziman Center for Real Estate. Consumer spending accounts for about 70 percent of GDP, so that drop would result in a reduction in real GDP growth of 1 percentage point, the study said.
Rising home prices fueled the surge in consumer spending during the first half of the decade. Now, falling values are a drag on GDP growth, the study suggests. Rising or falling home values has triple the effect on consumer spending of any increase or decrease in financial wealth, including stock holdings, according to the study.
``The reason, I believe, the effects are smaller for financial wealth than for housing wealth is that people tend to view those changes in housing wealth as more permanent,'' Gary Painter, director of research at the USC Lusk Center and one of the study's three authors, said in an interview. ``Consumption will be impacted by the decline in housing wealth for a while.''
The median price of an existing U.S. home dropped 9 percent to $191,600 in September from a year earlier, according to the National Association of Realtors in Chicago. The median price in September was down 17 percent from a record of $230,200 in July 2006.
Economists expect home prices to fall further before they begin to recover, said Stuart Gabriel, director of the UCLA Ziman Center and one of the study's authors. The Standard & Poor's 500 Index has fallen 35 percent this year through yesterday.
``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,'' Gabriel said in an interview. ``For every 10 percent decline in house prices nationally, our study suggests a 1 percentage point decline in real GDP growth.''
U.S. GDP probably contracted at a 0.5 percent annual rate from July to September, the biggest drop since the 2001 recession, according to the median estimate in a Bloomberg News survey ahead of Commerce Department figures being released Oct. 30. Consumer spending probably dropped by the most in almost two decades as job losses mounted, stock prices sank and property values declined.
The study by Painter, Gabriel and Raphael Bostic, associate director of the USC Lusk Center, is scheduled to be published next year in Regional Science and Urban Economics, an academic journal focused on issues related to housing and labor markets, transportation and local economies.
The study used data on household consumption and finances from the Federal Reserve's Survey of Consumer Finances, which tracks income and net worth for U.S. families, and the Bureau of Labor Statistics' Consumer Expenditure Survey, which provides information on the buying habits of American consumers.
To contact the reporter on this story: Daniel Taub in Los Angeles at firstname.lastname@example.org.
Last Updated: October 29, 2008 00:01 EDT