How Home Values Impact Hiring Rates
And why the baseball bat is mightier than the scalpel
Recently, the American Economics Association published an analysis of the housing market and young firm employment metrics by Steven Davis and John Haltiwagner. In summary, the authors found a strong relationship between local housing prices and the rate of employment at firms that are less than 72 months old. Their conclusion speaks to something fundamental to market analysis — our economy is incredibly interconnected.
I’d be remiss if I didn’t first address my hesitation to use this model in a predictive manner. The authors track variables dating back to the 1980s so that they can capture the recession in the late ‘80s, the boom and bust of the ‘90s and the Great Recession. In general, when the economy booms, the new firm start-up rate increases, when the economy busts, that rate decreases. The past two recessionary periods were also driven in some part by the housing industry. None of this invalidates the research done in this paper, but it calls into question our ability to separate these intertwined causes accurately. The authors utilized elasticities in their model to combat this, though a precise segmentation of housing prices and wider economic trends is presently unprovable and practically challenging.
Statistical models are like surgical tools, dissecting causal relationships with precision and projecting future outcomes to the nth decimal point. But such precision brings questions of accuracy made further problematic with the passage of time (were the projected outcomes accurate). Though the scalpel has virtue, I prefer the baseball bat. And Steven Davis and John Haltiwagner’s research makes for an excellent bat.
A house’s value is complex. Yes, it includes the raw supply of houses and condos in the area, but the demand-side valuation is driven by the compilation of individual preferences. There are “things” about a house that most people find valuable and there are “things” about a locality that most people find valuable. This is why the same home might be priced higher in one location than another. Perhaps it’s a better school district, a lower crime area, more public parks or fewer public services, the demand-driven value of any given home is subjective to individual preferences.
The same can be said of the practical supply-side valuation. All of those things that home buyers value in the housing market are also valued by the potential sellers in the housing market. Meaning that the price that entices a person to sell a highly desirable house is far higher than the price that would entice that person to sell a less desirable house.
So consider a person who may accept a job at a firm that requires them to move. The cost of selling their current home and of purchasing a new home are both transaction costs for the prospective employee. For the firm hoping to hire that employee, bearing some portion of those transaction costs is prudent, as is always the case for firms. This is typically done through the practice of relocation bonuses. In order for a given relocation bonus to cover these transaction costs, it must adjust with the local housing market — higher home values lead to higher relocation bonuses, and vice versa.
If this thought experiment expands beyond relocation to include traditional hirings, the transaction costs facing an individual changing jobs has less to do with specific home valuations and more to do with broader economic concerns. For example, an increase in commute time or the rigor of an onboarding process are transaction costs firms must cover to entice a prospective employee to change jobs within an industry.
A young firm searching to hire a new employee knows it must bear some portion of the transaction costs facing its prospective employees. If this young firm requires relocation, those transaction costs are directly impacted by the local housing market. But even if the firm does not require relocation, the housing market impacts its ability to bear those transaction costs. Houses and housing valuations significantly affect individual wealth, amplifying income effects during boom and bust periods. As seen in these charts from the St. Louis FRED, real (inflation-adjusted) household income and real residential property prices seem to rise and fall concurrently.
I’m simplifying here, but generally speaking, when housing prices fall, so too does income due to the wider impact of the housing market on the national economy, leading to a decrease in individual and firm wealth. This is especially true when young firm owners are more likely to own a house in the locality of their business.1 Continuing with this transaction costs lens, when home values decrease, firm owners are less able and less willing to internalize the transaction costs facing potential employees. The inverse is true when home values increase. This intuition follows exactly with Steven Davis and John Haltiwagner’s findings, as the hiring rate for young firms rise and fall with housing booms and busts since the 1980s. And it would be reasonable to assert that this trend applies to firms of all ages as well.
It’s easy to see that the ebbs and flows of the national economy would impact firm hiring rates. But if we theoretically separate the performance of the national economy and the housing market, it is the presence of transaction costs that illuminate the connection between housing prices and hiring rates. Firms attempt to internalize transaction costs facing their potential employees during the hiring process, and their willingness to do so is indirectly influenced by the impact home values have on individual wealth — an impact that is magnified in the case of young firms with local owners. Resulting in the trend found by the authors: as home values rise, so do hiring rates at young firms, and vice versa.
And while the scalpel of statistical modeling attempts to carve out precisely how much or how little the hiring rate will decrease if the value of homes decreases in the future, our baseball bat of theory has already hit a home run — simply suggesting with confidence that if home values decrease in the future, so too will the hiring rate, especially with young firms. Thus allowing firms to plan for this reality insofar as the future decrease in home values becomes material.
Davis, Steven J., and John Haltiwanger. 2024. "Dynamism Diminished: The Role of Housing Markets and Credit Conditions." American Economic Journal: Macroeconomics, 16 (2): 29-61.