The housing bubble and the GDP: a correlation perspective

One cannot pick up a financial publication or newspaper without noticing articles alleging, or at the very least insinuating, a relationship between the housing bubble burst and the most severe recession in the U.S. and other parts of the world since the great depression of the 1930’s. However, empirical studies statistically confirming such a relationship are a challenge to find. This study examines a relationship between the prices of houses and the United States GDP before, during, and after the period known as the “2007 global financial meltdown. ” The study also expands into the global environment through its literature review. Tracking a housing price index and the U.S. GDP numbers over the last five years, data was retrieved from different sources but aligned in equal time and periods, reviewed, subjected to Regression Analysis, and tested for significance. The results indicate that there exists a relationship between the two variables such that a quarterly change in the housing price index may yield a quarterly change in Real GDP. The hypothesis test rejects the null hypothesis, thus supporting the notion that they are linked. However, the specific elements or combination of causal factors including the toxic mortgage debt that may have triggered the economic slowdown may continue to be debated far into the future. Many factors and forces created the perfect storm for the global financial crisis. However, it appears that the subprime mortgage lending disaster, whose center was the price bubble of the housing market, was the spark that started it all