Housing, Credit Constraints, and Macro Stability: The Secondary Mortgage Market and Reduced Cyclicality of Residential Investment

As secondary mortgage markets developed and grew over the past two decades, fluctuations in residential investment and in mortgage balances were much smaller than they had been prior to the 1980s. We hypothesize that, by reducing the volatility of the total supply of funds to mortgage markets, larger secondary mortgage markets (SMM) dampened the responses of residential investment to income and to interest rates and thereby contributed importantly to the “Great Moderation” in volatility of the U.S. economy. Our empirical results provide some evidence that the SMM did continually reduce the volatility of residential investment over the past two decades by tempering its sensitivities to income and to interest rates