Residential Investment Research Articles

Cyclical Relationships Between GDP and Housing Market in France: Facts and Factors at Play

In this paper we focus on cycles and trends of some macroeconomic and housing market variables representative of the French economy. In a first part, we empirically show that cycles in the housing sector, measured by housing prices, housing starts, building permits, sales or residential investment, are strongly correlated to GDP cycles with a lead lying between of one and four quarters, suggesting thus that a monitoring of housing fluctuations could bring useful information for macroeconomic forecasting. Interestingly, this result is robust to the various considered approaches. Moreover, it seems that the housing sector long-term trend possesses its own dynamics, quite different from the global French economic activity. Thus, in a second part, we review various structural factors that could drive housing market developments in France in the future.

Household Leverage and the Recession of 2007 to 2009

We show that household leverage is an early and powerful predictor of the 2007 to 2009 recession. Counties in the U.S. that experienced a large increase in household leverage from 2002 to 2006 showed a sharp relative decline in durable consumption starting in the third quarter of 2006 – a full year before any significant change in unemployment. Similarly, counties with the highest reliance on credit card borrowing reduced durable consumption by significantly more following the financial crisis of the fall of 2008. Overall, our estimates show that household leverage growth and dependence on credit card borrowing explain a large fraction of the overall consumer default, house price, unemployment, residential investment, and durable consumption patterns during the recession. Our findings suggest that a focus on household finance may help elucidate the sources macroeconomic fluctuations.

Housing Finance and Monetary Policy

We study how the structure of housing finance affects the transmission of monetary policy shocks. We document three main facts: first, the features of residential mortgage markets differ markedly across industrialized countries; second, and according to a wide range of indicators, the transmission of monetary policy shocks to residential investment and house prices is significantly stronger in those countries with larger flexibility/development of mortgage markets; third, the transmission to consumption is stronger only in those countries where mortgage equity release is common and mortgage contracts are predominantly of the variable-rate type. We build a two-sector DSGE model with price stickiness and collateral constraints and analyze how the response of consumption and residential investment to monetary policy shocks is affected by alternative values of two institutional features: (i) down-payment rate; (ii) interest rate mortgage structure (variable vs. fixed rate). In line with our empirical evidence, the sensitivity of both variables to monetary policy shocks increases with lower values of the down-payment rate and is larger under a variable- rate mortgage structure.

The 'Housing Bubble' and Financial Factors: Insights from a Structural Model of the French and Spanish Residential Markets

Over the last decade, France and Spain have experienced property price and residential investment increases which were among the strongest and the lengthiest in the euro area. Although the quality of the underlying data limits the precision of the estimates, the present paper aims at analysing the fundamental factors behind these evolutions. The analysis presented here assesses whether the observed price dynamics may be attributed to a pure expectation bubble phenomenon or to the large changes in financial and demographic factors. This is done by means of a structural model of the demand and supply sides of the housing market with an error-correction process. When taking into account a standard set of macroeconomic variables, our estimates imply that residential property prices in France and Spain were approximately 20% above the level explained by their fundamentals. When demographic and financial factors such as the borrowing capacity are taken on board, the degree of overvaluation is drastically reduced. The adjustment path to equilibrium is slightly faster in France than in Spain, but both countries display significant downward rigidity in prices.

How Housing Booms Unwind: Income Effects, Wealth Effects, and Feedbacks through Financial Markets

This paper considers dynamics in the reversal of booms in the housing market. We analyze three related mechanisms which govern the propagation of changes in the housing market throughout the rest of an advanced economy: wealth effects, income effects, and effects through financial markets. As the decade-long boom in the US housing market unwinds, we anticipate that there will be small wealth effects transmitted to the economy, but there will be large income effects affecting the rest of the economy and substantial financial market effects. If the current decline in housing starts and residential investment echoes the declines of the last three housing downturns, we estimate that gross national product (GNP) growth will be reduced by close to 3 per cent. Beyond the decline in housing investment, the recent turmoil in financial markets makes a recession induced by housing market conditions increasingly likely.

Housing Market Spillovers: Evidence from an Estimated DSGE Model

The ability of a two-sector model to quantify the contribution of the housing market to business fluctuations is investigated using U.S. data and Bayesian methods. The estimated model, which contains nominal and real rigidities and collateral constraints, displays the following features: first, a large fraction of the upward trend in real housing prices over the last 40 years can be accounted for by slow technological progress in the housing sector; second, residential investment and housing prices are very sensitive to monetary policy and housing demand shocks; third, the wealth effects from housing on consumption are positive and significant, and have become more important over time. The structural nature of the model allows identifying and quantifying the sources of fluctuations in house prices and residential investment and measuring the contribution of housing booms and busts to business cycles.

First-Time Home Buyers and Residential Investment Volatility

Like other macroeconomic variables, residential investment has become much less volatile since the mid-1980s (recent experience notwithstanding.) This paper explores the role of structural change in this decline. Since the the early 1980s there have been many changes in the underlying structure of the economy, including those in the mortgage market which have made it easier to acquire a home. We examine how these changes affect residential investment volatility in a life-cycle model consistent with micro evidence on housing choices. We find that a decline in the rate of household formation, increased delay in marriage, and an increase in the cross-sectional variance of earnings drive the decline in volatility. Our findings provide support for the view that the Great Moderation in aggregate fluctuations is not just due to smaller aggregate shocks, but is driven at least in part by structural change.

Credit Matters: Empirical Evidenceon U.S. Macro-Financial Linkages

This paper develops a framework for analyzing macro-financial linkages in the United States. We estimate the effects of a negative shock to banks' capital/assetratio on lending standards, which in turn affect consumer credit, mortgages, and corporate loans, and the corresponding components of private spending (consumption, residential investment and business investment). In addition, our empirical model allows for feedback from spending and income to bank capital adequacy and credit. Hence, we trace the full credit cycle. An exogenous fall in the bank capital/asset ratio by one percentage point reduces real GDP by some 1½ percent through its effects on credit availability, while an exogenous fall in demand of 1 percent of GDP is gradually magnified to around 2 percent through financial feedback effects.

Monetary policy and the US housing market: A VAR analysis imposing sign restrictions

This article examines the impact of monetary policy shocks on the US housing market using an identification procedure similar to the one suggested by Uhlig [Uhlig, H., 2005. What are the effects of monetary policy on output? Results from an agnostic identification procedure. Journal of Monetary Economics 52, 381–419]. The identification procedure imposes sign restrictions on the response of some variables for a certain period. No restrictions are placed on the response of the housing variable. Overall, the results indicate that housing starts and residential investment respond negatively to contractionary monetary policy shocks. However, the magnitude of the impact is sensitive to the selection of the horizon for which the restrictions hold. Moreover, a comparison of the results with those obtained from a conventional Choleski decomposition, suggests that the impact of monetary policy on the housing market is much less certain under the sign restrictions approach.

Residential Investment and Business Cycles in an Open Economy: A Generalized Impulse Response Approach

We study the impact of residential and non-residential investment on economic growth using U.S. data. Unlike previous studies we include the external sector (net exports) in our estimations, and we calculate impulse response analysis using Pesaran and Shin’s (Economics Letters 58:17–29, 1998) generalized impulse response approach. We find that shocks to residential investment have a larger impact on GDP than shocks to non-residential investment, which supports the findings of the closed-economy approach of Coulson and Kim (Real Estate Economics 28:233–247, 2000). However, a closed economy model tends to overstate the importance of residential investment and understate the relevance of nonresidential investment.

The Great Society Subway: A History of the Washington Metro (review)

Reviewed by: The Great Society Subway: A History of the Washington Metro Gregory L. Thompson (bio) The Great Society Subway: A History of the Washington Metro. By Zachary M. Schrag . Baltimore: Johns Hopkins University Press, 2006. Pp. 384. $30. Over roughly a thirty-year period starting in the late 1960s, the Washington Metro expanded from nothing to about 105 miles of route at a cost of more than $7 billion. Almost 660,000 people a day now use its 86 monumental stations (each actually the size of the Washington Monument laid on its side), many buried far below the surface. In this superbly written book, Zachary Schrag, an assistant professor of history at George Mason University, explains how this achievement came about and what its impact is. In doing so, Schrag assumes the role not of one blind man describing the elephant (in this case, the Metro), but of eleven. The introduction and each of the ten subsequent chapters offer a fresh perspective. Schrag's command of disciplines needed to address each perspective is impressive, ranging from [End Page 216] urban history to academic transportation policy, from architecture to popu-lar culture, from urban planning to national and local politics, and from rail-transit technology to bus-transit politics, among others. His observations arise from a firm foundation of sources, including a broad secondary literature, technical reports, and numerous interviews with participants in the history of the Washington Metro. Observing the Metro with affection and the city it serves with empathy, Schrag first attacks economists and planners who dismiss rail-transit investments as a waste of public resources in the automobile-based culture of the United States. "I consider fun to be a legitimate goal of public policy," he proclaims. "If it is all right for an individual to spend his money on a snazzy sports car when a humble hatchback would get him to work just as well, why is it wrong for a region or nation of free people to buy collectively a more glamorous transit system . . .?" (pp. 286–87). He next presents a history of the region, emphasizing its governance, layout, and concern for monumentality, before turning to more contemporary transportation planning. Here he treats the complementary origin of a regional metropolitan-freeway network, including proposed routes crisscrossing the central city, and a proposed less-comprehensive regional rapid-transit system. He then recounts the origin and course of anti-freeway revolts by the local population, interwoven with a change of governance from congressional control to local control: he views the existing Metro system and the cancellation of most of the freeway system within the beltway as emerging from that process. There are beautifully written chapters on the evolution of the design of the system's characteristic stations, regional politics, the anti-freeway fight, the people promoting and building the system, financing, the impact of the system on development in both the central area and the suburbs, and the public face of the system. In addressing land-use impacts and ridership, Schrag notes that the system has not achieved the level of usage originally forecast, nor has it caused development to occur around stations unless there is large-scale public intervention. Even then, results have been mixed, particularly in the old downtown area. Nonetheless, by blocking construction of the freeway system inside the beltway, the District of Columbia has seen a resurgence of human-scale residential investment, and the Metro has provided a means not only for suburbanites to get into the District, but for District residents to avoid crushing auto congestion. Schrag concludes that every penny invested in the system has been worth it, and he underscores his conclusion with an evocative description of the public face of the system, those who use it, and what they experience. The major question that the author does not address adequately is whether the Metro has caused the region as a whole (outside of the District) to develop any differently than U.S. metropolitan areas where such an investment has not been made. Has the Metro slowed the rate of decentralization? [End Page 217] Has it reduced single-auto modal split? I suspect that the answer is "no" in both...

City Politics and Black Protest: The Economic Transformation of Harlem and Bronzeville

Can metropolitan political systems affect the level of Black-led protest politics? While researchers stress the importance of individual-level socio-economic status, others contend that a city's political landscape is an influential force in determining political engagement.Using a comparative ethnographic approach, this study explores how the distinct political situations in New York City (NYC) and Chicago relate to the proliferation of protest politics concerning displacement in two revitalizing African American communities. Harlem in NYC and Bronzeville in Chicago are currently experiencing major economic transformations. After middle-class flight and years of economic abandonment, these areas are experiencing an influx of commercial and residential investment, rapidly changing them from low to more mixed-income environments. Despite a substantial amount of positive media attention, there is little community consensus about the redevelopment that is occurring, since it is associated with displacement. Although these communities have similar socio-economic characteristics, the extent of protest politics stemming from these areas is vastly disparate; activism is much more pervasive in Harlem. NYC and Chicago have drastically different political landscapes; NYC's political system is fragmented and characterized as pluralistic, while Chicago has a centralized political machine. NYC's diverse political system facilitates contested politics while Chicago's monolithic party machine is associated with limited Black-led opposition. This study contributes to the notion that structural forces emanating from the city level strongly influence African American community politics.

Time Deformation, Continuous Euler Processes and Forecasting

Abstract. A continuous Euler model has time‐varying coefficients. Through a logarithmic time transformation, a continuous Euler model can be transformed to a continuous autoregressive (AR) model. By using the continuous Kalman filtering through the Laplace method, this article explores the data application of a continuous Euler process. This time deformation of an Euler process deforms specific time‐variant (non‐stationary) behaviour to time‐invariant (stationary) data on the deformed time scale. With these time‐invariant data on the transformed time scale, one may use traditional tools to conduct parameter estimation and forecasts. The obtained results can then be transformed back to the original time scale. Simulated data and actual data such as bat echolocation and the US residential investment growth are used to demonstrate the usefulness of time deformation in forecasting. The results indicate that fitting a traditional autoregressive moving‐average (ARMA) model on an Euler data set without imposing time transformation leads to forecasts that are out of phase while the forecasts of an Euler model stay mostly in phase.

Demography and housing demand—what can we learn from residential construction data?

There are obvious reasons why residential construction should depend on the population’s age structure. We estimate this relation on Swedish time series data and Organization for Economic Cooperation and Development panel data. Large groups of young adults are associated with higher rates of residential construction, but there is also a significant negative effect from those above 75. Age effects on residential investment are robust and forecast well out-of-sample in contrast to the corresponding house price results. This may explain why the debate around house prices and demography has been rather inconclusive. Rapidly aging populations in the industrialized world makes the future look bleak for the construction industry.

Housing, Credit Constraints, and Macro Stability: The Secondary Mortgage Market and Reduced Cyclicality of Residential Investment

Housing, Credit Constraints, and Macro Stability: The Secondary Mortgage Market and Reduced Cyclicality of Residential Investment by Joe Peek and James A. Wilcox. Published in volume 96, issue 2, pages 135-140 of American Economic Review, May 2006

The Impact of Buy to Let Residential Investment on Local Housing Markets: Evidence from Glasgow, Scotland

ABSTRACT The advent of the ‘buy to let’ (BTL) phenomenon in the UK, apart from producing a new wave of individualized rental market investment, has been widely judged to be a speculative and destabilizing force in the housing market. This paper provides a detailed empirical investigation of new residential investment in one city (Glasgow) where BTL has made a relatively large impact. In seeking to overcome data problems, the study employed qualitative (expert interviews and a landlord survey) and quantitative methods (census, the Register of Sasines, standardized house price information and modelling thereof) in order to assess the nature and scale of BTL, the motivations of investors and its impact on the private housing market. The evidence suggests that while Glasgow is in many respects different to rental markets elsewhere in the UK and although the investment has thus far largely occurred in a benign environment, the context for future investment, on balance, looks sustainable (i.e. favourable changes to pension planning law and the maturing market for BTL). Long-term market impact is an empirical question that depends on the specific interactions of market niches or segments (i.e. the first-time buyer market for apartments) with potential buy to let investment. Our conclusion, to borrow a Scottish legal term, is that BTL induced volatility is ‘not proven’.

HOUSING AND THE BUSINESS CYCLE*

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.

Housing and the Business Cycle

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.

Property Rights and Investment in Urban Slums

This paper examines the effect of changes in tenure security on residential investment in urban squatter neighborhoods. To address the endogeneity of property rights, I make use of variation in ownership status induced by a nationwide titling program in Peru. In a difference-in-difference analysis, I compare the change in housing investment before and after the program among participating households to the change in investment among two samples of nonparticipants. My results indicate that strengthening property rights in urban slums has a significant effect on residential investment: the rate of housing renovation rises by more than two-thirds of the baseline level. The bulk of the increase is financed without the use of credit, indicating that changes over time reflect an increase in investment incentives related to lower threat of eviction. (JEL: O12, O18, P25, P26)

Property Rights and Investment in Urban Slums

This paper examines the effect of changes in tenure security on residential investment in urban squatter neighborhoods. To address the endogeneity of property rights, I make use of variation in ownership status induced by a nation-wide titling program in Peru. In a difference-in-difference analysis, I compare the change in housing investment before and after the program among participating households to the change in investment among two samples of non-participants. My results indicate that strengthening property rights in urban slums has a significant effect on residential investment: the rate of housing renovation rises by more than two-thirds of the baseline level. The bulk of the increase is financed without the use of credit, indicating that changes over time reflect an increase in investment incentives related to lower threat of eviction.