An Empirical Investigation of Housing Investment under Uncertainty
In this paper, we focus on the response of housing investment to uncertainty in housing returns and interest rates. At the aggregate level, we regress quarterly housing starts on the levels and rolling standard deviations of housing returns and Treasury bill rates. We find that housing starts decline with higher volatility in either of these stated variables. We further explore these results using data on individuals from the American Housing Survey. We estimate the probability of observing major additions and improvements by individual homeowners, again finding that investment is less likely in the face of greater uncertainty about aggregate housing returns or interest rates. Our empirical results are consistent with the predictions of the theoretical literature on irreversible investment under uncertainty.