In the immediate aftermath of most recessions, housing expands more rapidly than any other component of GDP, and inflation falls. Through the first part of the expansion, housing increases and inflation remains low. In the latter part of expansions, housing ceases to respond to loose monetary policy, but inflation starts to develop. In response to developing inflation, the Fed tightens monetary policy in order to rein in inflation, housing begins a sharper decline, and the economy enters a recession. In most cases, declines in consumer durable goods expenditures begin to fall soon after the decline in housing, yet the decline in investment comes several quarters later, coincident with the start of the recession. Tightened monetary policy, and the general contraction that follows, eases inflationary pressures. As inflation subsides, the Fed returns to a looser monetary policy. At that point, housing begins a rapid resurgence, and the economy emerges from recession. As a recovery gains momentum, businesses respond to growing demand by increasing their capacity with investments in structures and equipment. This general pattern has played out in most post-war recessions, with only minor variations in the sequence of events.
I got to the paper by starting with Will Wilkinson. The authors are saying the same thing that we have been told by Ed Leamer, who they cite. From that perspective, economic fluctuations are dominated by housing, and we just had a big, bad housing crash.
It seems to follow that it will be difficult to have a recovery until we get a housing recovery. I continue to believe that it is counterproductive to try to fight foreclosures, because that keeps the housing market out of equilibrium and postpones the recovery.
Also, when James Hamilton wrote this I meant to link to it, but I forgot to publish the post. He emphasized the role of housing in the current downturn, and he also challenged the Sumnerian interpretation.
I should note that one problem with the “it was all housing” story is that much of the decline in housing construction was behind us before the bottom fell out of the economy in late 2008 and early 2009. Another problem is that an awful lot of the people who have lost their jobs were not in construction.