Bill McBride at Calculated Risk says he swears by Ed Leamer:
NBER - Housing is the business cycle. Quote from the paper:
The good news is that I am not a macro-economist. That frees me from the heavy conceptual burdens that most macro economists seem to carry. It allows me to conclude that Keynesian thinking, monetarism, rational expectations and real business cycles all suffer from the same problem – too much theory and not enough data. In particular, none of these comes to grips with the role of housing in modern US recessions.
Indeed, if you look up “real estate” in the index to Mankiw’s(2007) best selling Principles of Macroeconomics, you will find real exchange rates, real GDP, real interest rates, real variables, and even reality, but no real estate. Under “housing” you will find a reference to the CPI and to rent control, but no reference to the business cycle. I have not been able to find any macroeconomic textbook that places real estate front and center, where it belongs.
One thing I was wondering when I took my intermediate macro was, why don't we break down "investment" into inventories, business capital investment, government infrastructure, and housing? I mean, if investment swings are greater than the swings in overall GDP, why not look under the hood and see what's really going on with investment?
Leamer notes that his theory doesn't explain the 2000-2001 crash; maybe the explanatory variable, then, isn't so much housing as it is asset prices generally?
Still, he presents a good idea, though it's not written in the style of academic economics, which is probably good.