The housing market is a key component of the United States economy generally and the Southern California economy in particular. Mihaylo Professor Huiran Pan examines the key drivers of housing prices and their broader economic impact.
Housing prices are rising again in Southern California and across most of the United States, benefiting homeowners that saw what for most was their largest investment tumble in value during the downturn of the Great Recession.
Home prices are the key economic indicator for the real estate sector, which is an especially vital aspect of the local economy in Southern California. It was the rise in housing prices that stimulated the economic expansions of the 1980s and 2000s, for example, while the declines in the housing market in the early 1990s and late 2000s plunged the region into deep recessions.
Mihaylo Economics Professor Huiran Pan studied the changes in home prices and their relationship with the broader financial system in her 2013 study, House Prices, Bank Instability, and Economic Growth: Evidence from the Threshold Model, which appeared in the Journal of Banking and Finance. Pan found an important link between the performance of housing prices and the broader financial system. “The banking and financial systems, which function as mortgage lenders and frequently use real estate as collateral, link the housing market with the macro-economy,” she says. In the last housing downturn, “unemployment rates increased from 5.7% in 2005Q1 before the crisis to over 11% in 2009Q3 in California,” Pan notes.
Home prices are both a local and national phenomenon. According to Pan, “there is a common phenomenon in the national real estate market, while each state or Metropolitan Statistical Area (MSA) has its own characteristics in the local real estate market.” CSUF and Orange County are part of the Los Angeles-Long Beach-Anaheim MSA, which is the second-largest such region in the United States. Pan sees personal income and unemployment rates as the chief drivers of home prices in Southern California. Both of these factors are also negatively affected when prices decline, thus creating a serious downward spiral most recently seen in the Great Recession.