Question

Edward Leamer of the University of California , Los Angeles, argues that "housing is the business cycle." Why would spending on housing be likely to fluctuate more than spending by households on consumer durables , such as automobiles or furniture, or spending by firms on plant and equipment?

Answer 1

According to the author there is only evidence in theory that the rates of interests paid in the residential investment have a deep effect on the economy in general

Step-by-step explanation:

According to the author there is only evidence in theory that the rates of interests paid in the residential investment have a deep effect on the economy in general. Nevertheless, he explains how this theory is similar to the explanation about the effects of alcohol and how this explanation does not affect the way in which consumers buy it every time more and more. He says, in the housing business the same occurs. The author also mentions how in the majority of the text books the economic recessions are attributed to the residential investment effect, however in the real life practice it continuous to be a business that is always on track after it starts. Talking about consumer durables, the author explains how those decline a quarter of the housing volume and he attributes everything to a common denominator: interests and employment.

Answer 2

Explanation: Each housing market transaction is subject to a fixed cost, which gives rise to S-s policy rules for housing transactions: existing homeowners change the size of their houses only if there is a sufficiently large change in the state of the economy (i.e., in interest rates, in their taste for housing etc.

a significant negative relationship between interest rates and housing prices, which can rationalize a large part of the recent boom in housing prices in the US and around the world.