The U.S. economy experienced a severe financial crisis together with a housing bust in 2007–2008. The subsequent recession significantly affected the economy, which saw the deepest declines in consumption, investment, and employment since the Great Depression.
Can we pin the blame for this recession, and in particular the decline in household consumption, on the collapse in house prices? If we can understand whether—and how—a collapse in house prices triggers a decline in consumption, thus precipitating a recession, we can better formulate policies to prevent and mitigate future crises.
We focus on this link between housing and consumption because of housing’s prominent role in the run-up to the Great Recession; because consumption represents by far the largest component of GDP, and the one that impacts the well-being of U.S. households most directly; and because housing itself makes up a large share of U.S. households’ net worth.
This article appeared in the Third Quarter 2019 edition of Economic Insights. Download and read the full issue.