“Housing IS the business cycle”
“Housing is the business cycle” is the title of a 2007 paper by Edward Leamer, an American professor of economics and statistics. Leamer wrote:
“Housing is the most important factor in our economic recessions, and any attempt to control the business cycle needs to focus especially on residential investment.”
The title of the paper became frequently quoted in business publications, although a few writers have disagreed with Leamer’s conclusion.
Wikipedia: Edward E. Leamer
Edward E. Leamer (born May 24, 1944) is a professor of economics and statistics at UCLA. He is Chauncey J. Medberry Professor of Management and director of the UCLA Anderson Forecast.
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2007a. “Housing is the Business Cycle,” in Housing, Housing Finance, and Monetary Policy, Federal Reserve Bank of Kansas City, pp. 149-233.
The National Bureau of Economic Research
Housing IS the Business Cycle
Edward E. Leamer
NBER Working Paper No. 13428
Issued in September 2007
NBER Program(s): EFG ME
Of the components of GDP, residential investment offers by far the best early warning sign of an oncoming recession. Since World War II we have had eight recessions preceded by substantial problems in housing and consumer durables. Housing did not give an early warning of the Department of Defense Downturn after the Korean Armistice in 1953 or the Internet Comeuppance in 2001, nor should it have. By virtue of its prominence in our recessions, it makes sense for housing to play a prominent role in the conduct of monetary policy. A modified Taylor Rule would depend on a long-term measure of inflation having little to do with the phase in the cycle, and, in place of Taylor’s output gap, housing starts and the change in housing starts, which together form the best forward-looking indicator of the cycle of which I am aware. This would create pre-emptive anti-inflation policy in the middle of the expansions when housing is not so sensitive to interest rates, making it less likely that anti-inflation policies would be needed near the ends of expansions when housing is very interest rate sensitive, thus making our recessions less frequent and/or less severe.
Federal Reserve Bank of Kansas City—Housing, Housing Finance, and Monetary Policy (2007)
Pg. 149:
Housing is the business cycle
Edward E. Leamer
Pg. 150:
Housing is the most important factor in our economic recessions, and any attempt to control the business cycle needs to focus especially on residential investment.
The Wall Street Journal
The Housing Headache Felt All Over
By KELLY EVANS
Updated May 24, 2011 12:01 a.m. ET
Anyone playing down the importance of housing at this point in the business cycle is missing the point: Housing is the business cycle.
That is how Edward Leamer, a University of California, Los Angeles, economist, put it in a 2007 paper, and his point is pretty well-illustrated today. It is no secret housing and consumer spending have become increasingly important to economic cycles in recent decades. Yet economists and policy makers haven’t fully understood the implications of that, especially in regard to rising debt levels—one reason the current downturn is so severe.
The Economist
Wednesday, May 25th, 2011 at 12:24 am
Housing is the business cycle
Housing’s double dip does not bode well for the already anemic economic recovery. People often play down the importance of housing sector and cited housing sector was just 7% of the national economy.
But according Ed. Leamer, a prominent economics professor at UCLA and an expert on business cycle, “Anyone playing down the importance of housing at this point in the business cycle is missing the point: Housing is the business cycle.”
Architect magazine
Posted on: September 27, 2012
Will QE3 Save AEC?
The Fed’s decisive action to spur a faster recovery is just what the doctor ordered for architects, builders, and developers.
By Ryan Avent
“Housing is the business cycle,” goes economist Ed Leamer’s memorable phrase. A slight exaggeration, but construction and real estate are usually among the first sectors to fall on hard times when a recession looms, and they lead the way up when better times arrive. That leading role is mostly due to real estate’s high sensitivity to changes in interest rates. Interest rate moves are the way that the Federal Reserve adjusts interest rates to rein in an economy that is speeding toward inflation or perks up one that is creating jobs too slowly.
Pragmatic Capitalism
Housing IS the Business Cycle?
By Cullen Roche · Monday, January 21st, 2013
Interesting new paper here from UCLA’s Ed Leamer in which he argues that housing is the business cycle:
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I’d have to dive a bit deeper into this, but I do have to wonder if there isn’t a bit of recency bias in this data as real estate has disproportionately driven the US economy in the last decade. My thinking:
. Private residential real estate is only about 20-25% of private investment and only provides a narrow slice of the US economy.
. Being a rather small component of private investment, there’s not much one can decipher from residential investment data. Broader investment data is a FAR better indicator with many fewer false positives.
. Home prices, with the exception of the last 10 years, are extremely stable in the USA. Therefore, the activity in real estate tends to work with a long lag period making it far more stable than the business cycle itself.
. The last 10 years were truly a period of “it’s different this time” and I think researchers and pundits are falling victim to this bias.
The Atlantic
The Unluckiest Generation: What Will Become of Millennials?
Coming of age in a recession has set back Millennials for decades. The good news? In the age of abundance, they could turn out to be pretty great decades, anyway.
DEREK THOMPSONAPR 26 2013, 11:31 AM ET
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These life stages drive a consumer economy. “Housing IS the Business Cycle” is the memorably brief title of a 2007 study by University of California (Los Angeles) economist Edward E. Leamer showing that the housing market both presages recessions and bolsters recoveries. A generation that buys new homes is a generation that pushes the economy forward.
The Motley Fool
Housing Will Drive the Recovery
By Morgan Housel
May 29, 2013
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As one economist put it, “Housing IS the Business Cycle.” Housing caused the recession, and it will be responsible for our recovery.
Twitter
Aurelija Augulyte
@auaurelija
“Housing IS the business cycle” #US pic.twitter.com/04Bj3AYEk5
1:43 AM - 5 May 2014
Independent (Ireland)
House price inflation is not proof of a recovering economy
Published 07/06/2014|02:30 (June 7, 2014—ed.)
The great social scientist Ed Leamer coined the term “housing ‘is’ the business cycle”. Home ownership, home building and home ‘flipping’ characterised the 2002 to 2007 period. Now Dublin house prices and rental prices are rising while the rest of the country remains largely static.