The Housing Market and Residential Investment

Leamer (2007) points out that housing does not play any role in macroeconomic theory. In the index of Mankiw’s (2007) best-selling Principles of Macroeconomics there is no reference to ‘real estate’. The problem is not just with theory, but with applied macroeconomics too. There is no reference to housing either in the index of Zarnowitz’s (1992) Business Cycle, Theory, History, Indicators and Forecasting, or in Stock and Watson’s edited volume Business Cycles, Indicators and Forecasting (1993). However, as the housing market showed signs of cracking in 2005, but assumed a clear downtrend in 2007, the interest of theorists and practitioners in housing was quickly elevated with a Conference on Housing sponsored by the Federal Reserve Bank of Kansas City, Jackson Hole, Wyoming on 30 August–1 September 2007. Perhaps too late, the cynics would argue. However, Leamer’s (2007) critique is not fair, as the importance of the housing market and residential investment in the macroeconomy was recognised as early as 2000 by the OECD (2000b), who suggested that ‘In the United States … the contribution of real estate developments to the current economic expansion has been emphasised recently’ (p. 169). In fact, it is argued that ‘Over the 1996–99 period, the growth of housing wealth in excess of income growth in the United States may have contributed 0.4 percentage points to the total drop of the household saving ratio of some 2.4 percentage points’ (p. 179).