Is the Real Estate Sector More Responsive to Economy-Wide or Housing Market Conditions? An Exploratory Analysis

Abstract

This paper examines if the real estate economy, measured in various ways, is more responsive to conditions in the macroeconomy or the housing market at the state level. Total gross state product (GSP) and housing value serve as indicators of the conditions in the overall economy and housing market, respectively. The empirical findings, resulting from a panel data set of U.S. states over the period from 1997 to 2010, yield a number of interesting insights. First, descriptive statistics show that the real estate economy comprises over 10 % of the typical state economy. Thus, a strong and healthy real estate economy is vital for a state macroeconomy to prosper. Second, and not surprisingly, descriptive statistics also reveal that real estate GSP, employment, and wages fluctuated wildly over the 13 years period largely due to the Great Recession. Third, vector error correction modeling finds that a strong causal relationship exists between the macroeconomy and real estate economy in the long run. In addition, the results indicate that the effects of the state macroeconomy on the real estate economy are less cyclical and more immediate in the short run than those from the housing market. Thus, we interpret the findings as suggesting that conditions in the macroeconomy are more important for the real estate economy at the margin. However, we conclude that any real-estate public policy initiatives should be cautiously applied given the complex relationships that are observed between the state macroeconomy, real estate economy, and housing market.