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Housing’s Changing Role in the Business Cycle

Working paper #472
Susan M. Wachter and Mark Zandi

Residential real estate has been the cornerstone of the recent economic recovery. One-third of the economy’s growth since the start of the decade can be attributed to housing and mortgage market activity. During this period, home equity increased by $4 billion, thus counterbalancing for losses experienced in the recent bear market. Without the strong housing and mortgage markets, the overall economy would have experienced a decline and might still be near recession.

Housing and mortgage markets have rarely dampened an economic downturn in the past. Indeed, in every other downturn in the nation’s history, housing markets have exacerbated the economy’s basic problems. The new counter-cyclical behavior of the housing and mortgage markets is due to a number of factors, most important among them mortgage rates at or near 50-year lows. Mortgage rates cannot fall indefinitely and will likely rise with continued improvement in the economy, and housing and mortgage markets will therefore cool going forward. While these markets will cool, they will not collapse due to the integration of the U.S. mortgage market with global capital markets through the secondary market. The availability of fixed-rate mortgages has also increased as a result of the secondary market, thereby helping homeowners weather future increases in interest rates.

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