Homes and Cars: Why are the Cycles in Homes and Consumer Durables so Similar?

This paper reports three sets of facts: 1) Declines in housing are very good predictors of oncoming recessions in the U.S.; 2) Housing and consumer durables are the most important components of GDP that are soft prior to the official beginnings of recessions, and these two contribute substantially to weakness during recessions; and 3) The cycles in homes and consumer durables are very close, raising the prospect that a monetary rule that targeted housing would alleviate the cycle in consumer durables as well; this is confirmed in an econometric exercise with rates set to stabilize housing starts.These facts are used to argue in favor of monetary policy that prevents excessive building of homes and cars with preemptive rate increases in the middle of expansions when housing starts are above normal and growing higher. This contrasts with the traditional approach which is to raise rates late in expansions when inflation is apparent, but when the markets for homes and durables are very fragile because of excessive building earlier.