Economy

How Bubbly Housing Prices Helped Lift Startups


An abandoned home in Las Vegas

Photograph by Spencer Platt/Getty Images

An abandoned home in Las Vegas

It’s hardly news that a lot of entrepreneurs borrowed against inflated home values to fund their businesses during the bubble of the past decade. Recent research sheds light on the link between housing prices and small businesses. Areas where home values jumped before the 2007-09 recession saw substantially bigger increases in the number of new businesses and employment by small companies, according to a working paper from the National Bureau of Economic Research. Larger companies in the same places didn’t have the same growth in payrolls.

The effect was most pronounced in industries where it doesn’t take a lot of money to start a company, researchers at MIT and Duke wrote in the paper. That makes sense: You probably can’t use a home equity loan to start a big factory, but you could use it to start a small service business such as a home-care agency.

And the small business gains in bubbly housing markets weren’t just the consequence of greater demand for local services, such as construction: The researchers found that the pattern held true for businesses that shipped goods long distances, so the growth didn’t depend on local demand. Higher home values that gave business owners more collateral to borrow against accounted for as much as 10 percent to 25 percent of precrisis employment growth.

While the paper doesn’t really address the post-recession period, the results suggest that the long, steep drop in property values exacerbated the credit crunch for small business owners. Recent gains in home prices, then, are particularly good news for entrepreneurs.

John_tozzi
Tozzi is a reporter for Bloomberg Businessweek in New York.

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