NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

House Prices, Collateral, and Start-Up Businesses

The increase in start-ups and small-business hiring was more pronounced in areas with high run-ups in home values.

Collateral lending, especially mortgage lending, has long been recognized as an important financial catalyst that can drive overall demand for products and services within an economy. In House Prices, Collateral and Self-Employment (NBER Working Paper No. 18868), Manuel Adelino, Antoinette Schoar, and Felipe Severino determine that in areas of the United States with strong home-price increases before the 2008 financial crisis, the collateral lending channel contributed to strong employment gains in small businesses, but to smaller gains at large firms in the same industries. This employment growth was most noticeable in sectors that need little start-up capital, and it was evident even in manufacturing sectors in which products are shipped long distances, suggesting that local demand for products and services was not driving firms' expansion.

Previous studies had examined the connections between collateral lending and overall economic activity, but this study focuses on how collateral lending affects self-employment and business starts. The authors do this by examining "shocks" to the value of home collateral, and then differentiating between geographic areas where strong housing demand led to either higher home prices -- which translate into more collateral -- or higher new-home building -- which does not generate greater wealth and greater collateral for existing homeowners.

Their research shows that access to collateral allows individuals to start small businesses. The increase in start-ups and small-business hiring was more pronounced in areas with high run-ups in home values. The authors find that after 2008, the employment losses at small businesses in areas that previously experienced large home-price run-ups were about the same as, and in some cases smaller than, the employment losses at larger firms in the same geographic areas.

--Jay Fitzgerald

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