The Slowdown in Residential Investment and Future Prospects

Using a statistical model, we find that three factors explain most of the decline in residential investment at the end of 2013 and the beginning of 2014: the increase in mortgage rates since early 2013, the unusually cold winter, and a modest tightening of lending standards in the residential mortgage market. Future prospects for residential investment depend heavily on mortgage rates. A return to normal weather and easing lending standards would boost activity, but even moderate increases in mortgage rates through the end of next year could restrain residential investment going forward.