Abstract
ABSTRACT The leading role of residential investment in the business cycles is a robust stylized fact for the US economy. The housing bubble of the 2000s has increased interest in the macroeconomic relevance of this expenditure. However, there is still controversy surrounding its determinants. This article is an attempt to fulfill this gap. We propose to combine mortgage interest rate and house price inflation — two of the most relevant variables according to the literature — in a single index: houses’ own-rate of interest. This index represents the real cost of buying houses, so we expect a negative relationship with the growth rate of residential investment. Regarding the US economy from 1992 to 2019, we find a unidirectional negative correlation between houses’ own-rate of interest and residential investment growth rate in the long run. In the short-run adjustment process, we report no statistically significant effect of residential investment growth rate on houses’ own- rate of interest. Our results are robust to lag order specification and show that houses own-rate of interest explains more than half of the variability of residential investment rate of growth.
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