New and Old Housing Markets, Term Structure and the Macroeconomy

I construct a dynamic stochastic general equilibrium (DSGE) model in this paper to study the fluctuations in the U.S. housing markets. The model features a market for newly built houses, a secondary market for old houses, and an endogenous term structure of nominal interest rates. Negative technological progress in the housing sector explains the upward trend in house prices over the past four decades. Housing preference and technology innovations explain about 80% of the volatility of housing investment, real price of new houses, and the old-to-new house price ratio. Monetary factors explain about 15% of the volatility of housing investment, but do not significantly contribute to the price fluctuations of either new or old houses. The preference innovation to old houses is the leading determinant of the run-up in the price of old houses relative to the price of new houses during the 10-year period before the Great Recession. The term structure is endogenous in this paper, and the intertemporal preference innovation makes a non-negligible contribution to the variations in nominal interest rates. Housing market conditions do not contribute much to the fluctuations of interest rates, but significantly affect the shape of the yield curve.