Since the 1980s, the share of US workers employed at new businesses—a key indicator of business dynamism in the economy—has steadily declined, from 19.7 percent of private sector employees in 1989 to 10.4 percent in 2018. But over the course of this broad trend, young-firm employment moved in tandem with the large booms and busts in the US housing market, suggesting a close connection. 

In a paper in the American Economic Journal: Macroeconomics, authors Steven J. Davis and John Haltiwanger estimate the causal effects of local house price changes on local young-firm activity. They find that, in recent decades, fluctuations in housing prices have played a major role in medium-run fluctuations in business formation. 

Their results are based on an analysis of the Census Bureau’s Business Dynamic Statistics and Longitudinal Business Database and data at the state and local levels from the Federal Housing Finance Agency.

Figure 8 from the authors’ paper shows the relationship of house prices to swings in young-firm employment shares between 1981 and 2018.

Figure 8 from Davis and Haltiwanger (2024)

The solid blue bars are the logarithmic changes in young-firm employment shares about the sample mean, and the diagonal striped green bars are the changes in employment due to fluctuating housing prices, as estimated by the authors.

The chart shows that housing price gains from 1998 to 2006 raised the employment share by 12 log points, which offset more than half of the overall downward trend during this period. However, this boost to young-firm activity was completely undone by the Great Recession. In fact, from 2008 to 2010, the national housing bust accounted for about three-quarters of the decline in young-firm employment.

The findings demonstrate the importance of US housing markets to understanding recent trends in business dynamism in the United States.