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

Like US real gross domestic product (GDP), real residential investment has seen a marked moderation in volatility over the last two decades. Notably, this moderation in real residential investment (RESINV) occurred despite widespread problems in the banking system and a recession during the 1990-1991 period, the extended economic boom of the 1990s, and the 2001 recession and subsequent recovery. Compared with the 1968-1987 period during the 1988-2004 period, the standard deviations of GAP and the nominal mortgage interest rate were 41% and 51% lower, while that of RESINV declined by 64%. In this paper, the authors analyze why and estimate how much the development and growth of the secondary mortgage market may have dampened the responses of residential investment to income and interest rates and, thereby, may have contributed importantly to the reduction in the volatility of the aggregate US economy.