Housing and the Changing Impact of Monetary Policy

Housing is the leading indicator of the business cycle. The impact of monetary policy on housing has thus unsurprisingly been the subject of numerous studies. Some have also investigated whether the impact of monetary policy has changed since the mid-1980s. These papers to date have relied on vector-autoregressions (VARs). To avoid some of the specification issues of VARs, we employ the local projection method. We find a clear effect of monetary shocks on housing variables over the entire sample. However, we also find that since 1983, there is no significant impact of policy shocks on either home prices or investment. Moreover, as the difference between the estimated impact of monetary policy on GDP before and after 1983 was not as large as the same difference for housing variables, we infer that changes to housing finance, rather than simply more stable monetary policy, deserve some credit for the lesser impact of Fed shocks.