Housing and the Macroeconomy.

Abstract

The housing market and the macroeconomy interact in numerous ways. Changes in home values affect household wealth and consumption decisions. Changes in the macroeconomy drive overall demand for and supply of housing. This dissertation examines interactions between the housing market and the macroeconomy.

Chapters 1 and 2 identify the importance of age and future mobility as transmission channels for wealth effects from owner-occupied housing. Chapter 1 develops a model that considers the user cost of housing in calculations of net housing wealth. The model demonstrates that changes in user cost cause changes in housing wealth to be smaller than corresponding capital gains, and that this relationship differs across households according to age and mobility. Changes in the annuity value of net housing wealth are generally much smaller than capital gains, and the age and future mobility of a household each have large, distinct impacts on the MPC out of housing gains. Chapter 2 presents econometric tests of the model developed in Chapter 1. I use a maximum likelihood Heckman selection model on data from the PSID to estimate household mobility, and use fixed effects regression to examine the MPCs out of stock market and housing gains. I find that the MPC out of stock gains is smaller than that out of housing, that the MPC out of housing gains increases with age, and that mobility affects the response of consumption to home gains.

Chapter 3 explores linkages between the housing market and business cycles, with a focus on housing market dynamics during recessions. It establishes empirical regularities in the markets for both new and existing homes for the following variables: home prices, inventories of unsold homes, sales volumes, the inventory-sales ratio, time on market, and new construction starts. I conclude that home prices are not good indicators of business cycles, and that sales volumes and starts are leading indicators of recessions. I find that the inventory-sales ratio is the strongest contemporaneous housing market indicator, and that it predicts housing starts. Finally, I find that the markets for new and existing homes move together, apart from the behavior of inventories.