Housing and Macroeconomics

Abstract

The earlier literature on macroeconomics focused on determining aggregate variables such as gross domestic product (GDP), inflation rate, and unemployment rate. It had little interaction with the literature on housing. The importance of housing in the macroeconomy has been recently discovered, and the macro-housing field is in development. The recent literature addresses several policy-relevant issues that are important for macroeconomics and housing strands of literature. One of the significant developments is the research on the rental market, as a considerable portion of the world population are renters. For instance, the impact of some macroeconomic policies depends on how easily a unit is converted between rental or owner-occupied housing. Just as failure to keep up with the mortgage payment in owner-occupied housing would lead to bankruptcy, failure to pay rent as the contract described could lead to eviction. The literature has started to investigate the causes and costs of such displacement. Some authors also explore whether public rental housing is a desirable policy. Another active research area is affordability. Some people could afford to rent but not own housing in some cities. Some may move to places where they can be house owners. The literature has started to explore such interactions of the locational choice with the tenure choice (i.e., to rent or to own). The durability of housing makes it a long-term investment. Hence, the timing and pricing of the current period housing transaction depend on the expectations of future prices. Moreover, the recent period transactions in the housing market could, in turn, affect future prices. Therefore, self-fulfilling prophecies are possible, and it is crucial to study the formation and evolution of expectations in the housing market. Some researchers have taken up the challenges and made some progress. Last but not least, the literature has extended from a single-market to a multi-market setting. Emerging literature studies the local housing and labor market, such as the county level, and brings results that challenge conventional wisdom. In response, a few authors have developed sophisticated multi-regional dynamic general equilibrium models to match the cross-sectional and time series facts and maintain the forward-looking assumption in the macroeconomics tradition. Those new models also help us to identify shocks that are not directly observable to econometricians and, at the same time, are essential to account for cross-sectional economic facts. They can bring us closer to the actual situation. In sum, the recent developments in macro-housing literature are exciting and encouraging. They would accompany scholars on the journey of evidence-based public policy formation.