The sale of new homes is associated with a direct contribution to
GDP, based on the value of construction put in place. However, the
sales prices for existing homes do not enter into the calculation of
the nation's domestic output because the transaction does not represent
new production. For those reasons, some people may believe that the
sale of an existing home does not have an impact on GDP; this is wrong.
Purchases related to the transaction of existing home sales are
included in GDP. For example, all payments for services rendered, such
as those by a real estate agent, home inspector, attorney, or loan
originator, are included. These activities involve actual labor hours
for the value the service provided adds to the transaction.
The National Association of Realtors® estimates that each home sale
at the median generates $63,101 of economic impact (2008). We
conservatively estimate that commissions, fees, and moving expenses
associated directly with the purchase are about 9 percent of the median
home price (we use an annual price because of seasonal fluctuation in
home prices). Furnishing and remodeling expenses are a little more than
$5,000 based on a Harvard Joint Center for Housing Studies figure.
Further, all economic activity produces a multiplier effect. The
multiplier effect is how we estimate the fact that income earned in
other sectors of the economy as a result of a home sale is then
re-circulated into the economy. In this case the income earned by those
working to complete the home sale, by movers, attorneys, inspectors,
and furniture salesmen, generates another round of purchases by them
and income for others. The multiplier effect depends on the degree of
monetary policy accommodation and the crowding out effect. The
National Association of Realtors®' macroeconomic modeling suggests that
the multiplier is between 1.34 and 1.62 in the first year or two after
an autonomous increase in spending. This means that each dollar
increase in direct housing activity will increase the overall GDP by
$1.34 to $1.62.
Finally, because existing home sales have typically been associated
with new construction at a ratio of eight to one, we add in one-eighth
of the new home price to approximate the value of this construction
being added to GDP.
Impact of Single Existing Home Purchase
Real Estate Industries
$ 17,829 +
$ 5,331 +
$ 11,117 +
$ 28,825 =
Aside from this direct and measurable impact to the economy, there are
important but less easily measured effects of home sales, especially in
the current environment. As home sales occur, they help to reduce
inventory1. Lower inventory reduces downward pressure on
home prices which brings more buyers into the market and ultimately
helps prices stabilize. As home prices stabilize, the equity or wealth
of home owners, whose largest asset is often their home, also
stabilizes. This stabilization of wealth removes a major downward
pressure on consumer spending that exists right now2 and will help stabilize GDP3.
Furthermore, a housing recovery will stem the bleeding in bank balance
sheets and help to steady financial markets, ultimately putting the
economy back on track for sustainable growth.
Inventory in the last year has been between 9 and 11 months supply
whereas normal inventory conditions have tended to be between 4 and 6
months of supply on the market.
Studies show that the “wealth effect,” the tendency of consumers to
consider changes in wealth in spending decisions, leads consumers to
spend $0.06 - $0.08 of any increase in housing wealth. There are
currently not as many studies of the size of the wealth effect when
wealth is declining, but we can assume that the effect might be
 In 2008 Q4 consumer spending caused a 3.0 percent drag on GDP according to data from the BEA.