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Implications of Mortgage Market Structure for Housing and Economic Activity

Implications of Mortgage Market Structure for Housing and Economic Activity. Laura Middlesworth University of Wisconsin – Eau Claire. U.S. Residential Investment, % of GDP. Sources: OECD, NBER. Work Started on Dwellings. Sources: OECD, NBER. Permits for New Private Housing Units.

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Implications of Mortgage Market Structure for Housing and Economic Activity

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  1. Implications of Mortgage Market Structure for Housing and Economic Activity Laura Middlesworth University of Wisconsin – Eau Claire

  2. U.S. Residential Investment, % of GDP Sources: OECD, NBER

  3. Work Started on Dwellings Sources: OECD, NBER

  4. Permits for New Private Housing Units Sources: U.S. Census Bureau, NBER

  5. After 20 quarters, permits for new housing units accounts for… • 15% of variation in GDP growth • 26% of variation in residential investment • After 20 quarters, 38% of the variation in residential investment is attributed to the interest rate

  6. Impulse response functions suggest that a shock to permits has a more pronounced impact on GDP growth vs. a shock to residential investment

  7. A shock to permits has a lasting impact on residential investment.

  8. Housing and the Business Cycle • Leamer (2007): In the post-war era, residential investment was the greatest contributor to weakness in GDP growth prior to 6 out of 10recessions • Volumes, not prices, matter • Is residential investment so important because of mortgage market structure in U.S.?

  9. Residential Investment-to-GDP Ratio Source: OECD

  10. Residential Investment Source: OECD

  11. Mortgage Market Structure Source: Tsatsaronis and Zhu (2004)

  12. Variation in GDP Growth Attributed to Private Sector Credit

  13. Variation in Residential Investment Attributed to Private Sector Credit

  14. Variation in Residential Investment Attributed to the Interest Rate

  15. Variation in GDP Growth Attributed to Residential Investment

  16. Variation in GDP Growth Attributed to the Interest Rate

  17. Variation in GDP Growth Attributed to Permits for New Housing Units

  18. Summary of Preliminary Results • More variation in residential investment is attributed to interest rates for countries with variable rate mortgages • Possible reason for smaller amount of variation of GDP growth attributed to residential investment? • Mixed results for impact of private sector credit on GDP growth, residential investment • More variation in GDP growth is attributed to permits for countries with more aggressive lending • Possible explanations?

  19. Works Cited • Cardarelli et al. “The Changing Housing Cycle and the Implications for Monetary Policy,” World Economic Outlook, No. 84, 2008. • Leamer, Edward. “Housing is the Business Cycle,” NBER Working Paper No. 13428, 2007. • Tsatsaronis, Kostas and Haibin Zhu. “What Drives Housing Price Dynamics: Cross-Country Evidence,” BIS Quarterly Review, March 2004.

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