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Dynamism diminished: The role of housing markets and credit conditions

John Haltiwanger looks at the effect of housing market shocks on young businesses and start-ups

Faculty Associate John Haltiwanger and his colleague Steven J. Davis studied the impact of housing market on young companies and local economies. Their working paper, “Dynamism diminished: The role of housing markets and credit conditions” tracks data from the early 1980s on young-company employment, housing prices, population growth and cyclical conditions in U.S. metropolitan areas. They found that drops in housing prices triggered the collapse of young companies during and after the Great Recession. Thus, housing drops were the main cause of such collapse and also a pullback in bank lending played a secondary role. This effect impacts local economies through the consumption demand, meaning that when home prices bust, homeowners feel less wealthy and tend to spend less on locally supplied goods and services. Consequently, companies are affected when there is less demand of their services. Newer companies tap into an owner’s personal housing wealth directly and also as collateral for credit. Therefore, it is harder for young businesses to stay afloat and for new business to start up. Finally, the researchers concluded that younger and less-educated workers were strongly impacted because newer companies tend to hire them.

See the NBER Working Paper "Dynamism Diminished: The Role of Housing Markets and Credit Conditions" 

See Rebecca Stropoli's Chicago Booth Review item