HOUSING AND THE BUSINESS CYCLE*

Abstract

In the United States, the percentage standard deviation of residential investment is more than twice that of nonresidential investment. In addition, GDP, consumption, and both types of investment co‐move positively. We reproduce these facts in a calibrated multisector growth model where construction, manufacturing, and services are combined, in different proportions, to produce consumption, business investment, and residential structures. New housing requires land in addition to new structures. The model can also account for important features of industry‐level data. In particular, hours and output in all industries are positively correlated, and are most volatile in construction.