Housing and the Business Cycle*

Abstract

In the United States, the percentage standard deviation of residential investment is more than twice that of nonresidential investment. In addition, GDP, consumption, and both types of investment co-move positively. We reproduce these facts in a calibrated multisector growth model where construction, manufacturing, and services are combined, in different proportions, to produce consumption, business investment, and residential structures. New housing requires land in addition to new structures. The model can also account for important features of industry-level data. In particular, hours and output in all industries are positively correlated, and are most volatile in construction. *

International capital flows and expectation-driven boom–bust cycles in the housing market

“…As a result, current house prices are anchored by a stable long-run level of future house prices and do not fluctuate much. This is the same result as Davis and Heathcote (2005), which find that fluctuations in house prices are small in a business cycle model with stationary productivity shocks.…”

“…See Davis and Heathcote (2005) for the description of this method. The calibrated value for a is a little lower than the standard value, as the model separates housing services from the other components of value-added production.…”

“…To better understand the relationships between credit transactions and the formation of housing-market boom-bust cycles, this paper provides a model in which housing-market boom-bust cycles occur endogenously, and examines the sensitivity of house-price dynamics to credit market conditions. As illustrated by Davis and Heathcote (2005), it is difficult to generate large endogenous fluctuations in house prices in business cycle models. To generate housing-market boom-bust cycles, this paper considers uncertainty regarding the duration of a period of temporarily high income growth.…”

House prices, capital inflows and macroprudential policy

“…We assume perfect substitution of labor across sectors. Similar to Davis and Heathcote (2005) and Iacoviello and Neri, 2010, we calibrate the share of land in the housing production a L ¼ 0:10 and the capital share in the housing production a h ¼ 0:10. Figs.…”

Housing, home production, and the equity- and value-premium puzzles

“…First, agents in our model pay no adjustment or moving costs if they change the amount of housing they own or rent. This is a standard assumption in macroeconomic studies of residential investment (see Davis and Heathcote, 2005, for example). Second, rather than specify all households as owner-occupiers, we assume that households rent their home capital each period from a decentralized market.…”