Monetary Policy Transmission to Residential Investment

[...]In the first half of the paper, we review the significantchanges in the housing finance system over the past thirty yearsand discuss the implications of these changes for the cost andavailability of mortgage credit. In the second half, we present atwo-part econometric analysis of the transmission of changesin monetary policy to residential investment. The first part usesa small, reduced-form macroeconomic model to examine theresponse of the housing market to a monetary policy “shock.”We then use a structural model of investment in single-familyhousing to examine the effect that the changes in the housingfinance system have had on the housing market and on theresponse of that market to changes in monetary policy. Ourmain conclusion is that the eventual magnitude of the responseof residential investment to a given change in monetary policyis similar to what it has been in the past. However, thatresponse does not occur as quickly as it did under the oldhousing finance system and its timing is now similar to that ofthe overall economy.