Residual user

Residual user

Residual User Hypothesis:

Economic theory regarding residential construction.

The belief that residential construction cannot compete with other industries for inputs and cheap credit during high-boom periods. Consequently, this industry is a "residual user" utilizing resources only when other users cannot maximize their production. (i.e. during a recession or weak demand).

As a result, home construction tends to be counter-cyclical - financing can be acquired cheaply when the Federal Reserve is easing rates. Also, leases and rents tend to stay level compared to other goods during economic cycles, and as a result this makes construction more profitable during weak economic times and less so during a strong economy.

References

* [http://www.haas.berkeley.edu/Courses/Fall2000/BA280/Past_Exams/Final2SolutionsPart2.htm Residual User Hypothesis -- Counter-Cyclical Residential Construction Activity] at berkeley.edu


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