Chapter 12. Housing, Finance, and the Macroeconomy

In this chapter, we review and discuss the large body of research that has developed over the past 10-plus years that explores the interconnection of macroeconomics, finance, and housing. We focus on three major topics—housing and the business cycle, housing and portfolio choice, and housing and asset returns—and then review the recent literature that studies housing and the macroeconomy during the great housing boom and bust of 2000–2010. Our emphasis is on calibrated models that can be compared with data. In each section, we discuss the important questions, the typical set of tools used, and the insights that result from influential articles. Although great progress has been made in understanding the impact of housing outcomes on macroeconomic aggregates and vice versa, work remains. For example, economists recognize the importance of changing credit-market conditions in amplifying the volatility of house prices, but cannot explain the timing of these changes. At the end of the chapter, we discuss a new literature that assesses the macroeconomic effects and welfare implications of housing policies.