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Abstract
During the post-World War II period the residential construction industry experienced a series of short-term cycles in building activity. The amplitude of these fluctuations increased after 1965 despite efforts by federal credit agencies to reduce the instability. This dissertation provides an empirical analyses of residential construction during the 1964-1980 period and attempts to explain the underlying causes of the building cycles.
The study begins with a survey of previous research. First, the major theories of the postwar housing cycle are discussed. Second, the earlier empirical analysis of the residential sector are reviewed in order to establish the current state of the art in this field.
The econometric model which serves as the basis of the study treats the single- and multi-family housing markets separately. The single-family sector of the model contains equations for both the demand for and the supply of housing starts. The multi-family sector contains a single (supply) equation for starts. The model includes equations for the mortgage interest rate on both single- and multi-unit structures.
The effects of changes in interest rates as opposed to noninterest credit terms are clearly differentiated. Also, the model contains a variable to show the impact of changes in the value of single-family houses as an investment for capital gains.
The estimation results attest to the validity of the model and clarify a number of basic issues concerning the postwar building cycles. First, the results indicate that while credit has been the dominant factor behind the fluctuations, other factors associated with the inventory adjustment process in the multi-family sector have also contributed to the housing sector's instability. Second, the results demonstrate that the noninterest credit terms have had an impact on construction which is separable from the effect of interest rates. Finally, the results suggest that the wider amplitude of the building cycles after 1965 can be largely attributed to the impact of Regulation Q on savings flows to banks and thrifts and to changes in the value of housing as an asset during a period of high inflation.