Real estate shocks and unemployment

Published on September 30, 2020   13 min
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Hello. I'm Jaime Luque, Associate Professor at ESCP Europe. Before this, I was faculty at the University of Wisconsin School of Business in the real estate department.
Today's topic, it's about how economic shocks or real estate shocks are going to propagate the rest of the country, the economy. In particular, we are going to focus on how unemployment is going to propagate from one region to another. We want to understand the market mechanism of these propagation effects and we are going to focus our discussion on the evolution of unemployment in the United States after house prices plummeted starting in 2008. Most of our discussion and figures in this lecture come from the book by Mian and Sufi, House of Debt, which is a seminal book that explains the nuts and bolts of the subprime crisis of 2008.
Here's the motivating example. Let's look at the case of Tennessee in the United States. Tennessee mostly avoided the housing boom and bust. House prices rose by only 25 percent between 2002 to 2006. We have to compare this figure with, for example, the growth rate of house prices in California and Florida, which on average they grew around 60 percent. Households in Tennessee came to the recession with debt levels below the national average and net-worth dropped by only two percent during housing crash. Again, very different from states such as California or Florida. Tennessee is also interesting for us because it has the six largest fraction of workers in the auto manufacturing industry in the United States. Most of these cars that are sold, were sold to states that were hit by the subprime crisis. Now, the case study is to think about possibility of a shock. States such as California, we know that there was a real estate shock. There was a lot of unemployment related to real estate. Think about those workers in the real estate industry that decided to buy a car. Most of these cars were produced in Tennessee. Here's the link. A shock in California will affect the auto industry in Tennessee. Moreover, we expect to see a lot of unemployment in both states. How this transmission mechanism is produced is the object of this lecture. Now, the final fact that motivates our discussion today is that during the Great Recession, one out of four people working in the auto industry in Tennessee lost their job. It's equivalent to saying that 25 percent of auto workers in Tennessee lost their job.