This paper demonstrates that risk (uncertainty) along with the monetary (interest rates) shocks to the
housing production sector are a quantitatively important impulse mechanism for the business and housing cycles. Our model framework is that of the housing supply/banking sector model as developed in Dorofeenko, Lee, and Salyer (2014) with the model of housing demand presented in Iacoviello and Neri (2010). We examine how the factors of production uncertainty,financial intermediation, and credit constrained households can affect housing prices and aggregate economic activity. Moreover, this analysis is cast within a monetary framework which permits a study of how monetary policy can be used to mitigate the deleterious effects of cyclical phenomenon that originates in the housing sector. We provide empirical evidence that large housing price and residential investment boom and bust cycles in Europe and the U.S.
over the last few years are driven largely by economic fundamentals and financial constraints.We also find
that, quantitatively, the impact of risk and monetary shocks are almost as great as that from technology
shocks on some of the aggregate real variables. This comparison carries over to housing market variables
such as the price of housing, the risk premium on loans, and the bankruptcy rate of housing producers.