The Impact of Fiscal Policy on Housing in the U.S.

Abstract

Theory and empirical evidence have provided contradictory predictions and findings on the impact of government spending on housing investment and home values. An increase in government outlays may boost output and activity, but housing investment, like other investment, could be subject to crowding out. We employ traditional vector-autoregressions, which have been employed in all previous studies on the topic. Given deficiencies in the VAR method we also utilize local linear projections. In addition we directly compare the impact of government spending on both housing investment (residential investment, permits, sales, starts) and non-residential investment. We find fiscal expansion leads to unambiguously greater crowding out of housing activity than for non-housing investment. We also find housing is more sensitive to monetary policy than non-residential investment. Thus housing appears more sensitive to policy shocks than non-housing capital spending. In contrast to housing investment, home prices, while reacting negatively to government spending shocks, don’t exhibit the magnitude of the reaction of housing, or even non-housing investment. This likely reflects the sticky price nature of housing markets, with falling purchases leading to greater “time on market” more than falling prices.