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That's not really surprising, considering that's exactly how interest rate increases are supposed to work. They crowd out a bit of business investment and a lot

That's not really surprising, considering that's exactly how interest rate increases are supposed to work. They crowd out a bit of business investment and a lot of housing investment [1]. This in turn cools the economy by curtailing construction. Unfortunately, housing in most areas was screwed to begin with. This was not nearly the case with prior inflation bouts that required rate increases. The Fed was left with two bad choices. It did what it had to do. If the economy was Windows XP, housing would be its networking stack - its most exploitable sector. This is largely because of local governance and regulatory capture [2]. Housing has been artificially undersupplied for 5 decades under a variety of pretexts, such as architectural integrity. It has effectively turned the sector into a pyramid scheme that captures the wages of renters. [1] https://archive.is/8wAry https://archive.is/8wAry (from https://www.nytimes.com/2022/04/19/opinion/inflation-interest-rates-housing-mortgage-loan.html https://www.nytimes.com/2022/04/19/opinion/inflation-interes...) [2] https://en.wikipedia.org/wiki/Regulatory_capture https://en.wikipedia.org/wiki/Regulatory_capture

adamc 2y ago
It was a problem even before the interest rate rises, although that certainly made it worse.
dh77l 2y ago
Its a little more than the networking stack - https://www.investopedia.com/terms/f/fire-economy.asp https://www.investopedia.com/terms/f/fire-economy.asp
_heimdall 2y ago
If you want to consider interest rates in the usual model where increases are meant to reduce demand and lower prices, the Fed either really screwed up or we're about to see a huge drop in the housing market. Prices consistently went up over the last couple years of high rates. The recent fed funds rate drop didn't seem to help, and last I checked loan rates had stayed flat or actually gone up a bit. If loans weren't hurt enough them the Fed stopped raising rates too early and dropped much too early. Otherwise it would seem that they dropped in anticipation of something coming and loan rates are staying high anticipating higher risk of the same issues ahead.
- worstspotgain 2y ago
  Prices are not the relevant statistic though, it's housing starts [1]. They dropped from ~1.8M in April 2022 to ~1.3M today. Prices are affected by supply and demand equally, while starts are much more affected by supply. As for how the Treasury and Fed managed the crisis, it was easily the most incredible macro success story since I've been alive. Had you told me in 2022 that they'd manage sub-3% inflation without a recession at all, I'd have said you believed in fairy tales. [1] https://fred.stlouisfed.org/series/HOUST https://fred.stlouisfed.org/series/HOUST
  - _heimdall 2y ago
    > Prices are not the relevant statistic though, it's housing starts [1]. They dropped from ~1.8M in April 2022 to ~1.3M today. Prices are affected by supply and demand equally, while starts are much more affected by supply. New construction and prices are always connected, I'm not sure how you could consider one without the other. New builds increases supply, but building them requires buyers willing to pay market price for them. You can't have one without the other. > As for how the Treasury and Fed managed the crisis, it was easily the most incredible macro success story since I've been alive. Had you told me in 2022 that they'd manage sub-3% inflation without a recession at all, I'd have said you believed in fairy tales. Its too early to make that call either way. They may very well have managed the "soft landing" they kept pitching, but we really won't know for sure for at least a decade or so. Markets move slow and economies move even slower, give it time to shake out before popping bottles and awarding Nobel Prizes.
    - worstspotgain 2y ago
      The goal in increasing rates is to cool the economy by reducing construction, i.e. housing starts. Exchanging existing units doesn't affect employment and output as much. Since starts dropped by a third, it follows that prices would have been even higher without the raise in rates. > we really won't know for sure for at least a decade or so We absolutely already know. The contractionary effect of a raise in rates is largest in the short term. You can't have a lagging effect after rates are cut if there was no contraction to begin with.

adamc 2y ago

It was a problem even before the interest rate rises, although that certainly made it worse.

dh77l 2y ago

Its a little more than the networking stack - https://www.investopedia.com/terms/f/fire-economy.asp https://www.investopedia.com/terms/f/fire-economy.asp

_heimdall 2y ago

If you want to consider interest rates in the usual model where increases are meant to reduce demand and lower prices, the Fed either really screwed up or we're about to see a huge drop in the housing market. Prices consistently went up over the last couple years of high rates. The recent fed funds rate drop didn't seem to help, and last I checked loan rates had stayed flat or actually gone up a bit. If loans weren't hurt enough them the Fed stopped raising rates too early and dropped much too early. Otherwise it would seem that they dropped in anticipation of something coming and loan rates are staying high anticipating higher risk of the same issues ahead.

worstspotgain 2y ago
Prices are not the relevant statistic though, it's housing starts [1]. They dropped from ~1.8M in April 2022 to ~1.3M today. Prices are affected by supply and demand equally, while starts are much more affected by supply. As for how the Treasury and Fed managed the crisis, it was easily the most incredible macro success story since I've been alive. Had you told me in 2022 that they'd manage sub-3% inflation without a recession at all, I'd have said you believed in fairy tales. [1] https://fred.stlouisfed.org/series/HOUST https://fred.stlouisfed.org/series/HOUST
- _heimdall 2y ago
  > Prices are not the relevant statistic though, it's housing starts [1]. They dropped from ~1.8M in April 2022 to ~1.3M today. Prices are affected by supply and demand equally, while starts are much more affected by supply. New construction and prices are always connected, I'm not sure how you could consider one without the other. New builds increases supply, but building them requires buyers willing to pay market price for them. You can't have one without the other. > As for how the Treasury and Fed managed the crisis, it was easily the most incredible macro success story since I've been alive. Had you told me in 2022 that they'd manage sub-3% inflation without a recession at all, I'd have said you believed in fairy tales. Its too early to make that call either way. They may very well have managed the "soft landing" they kept pitching, but we really won't know for sure for at least a decade or so. Markets move slow and economies move even slower, give it time to shake out before popping bottles and awarding Nobel Prizes.
  - worstspotgain 2y ago
    The goal in increasing rates is to cool the economy by reducing construction, i.e. housing starts. Exchanging existing units doesn't affect employment and output as much. Since starts dropped by a third, it follows that prices would have been even higher without the raise in rates. > we really won't know for sure for at least a decade or so We absolutely already know. The contractionary effect of a raise in rates is largest in the short term. You can't have a lagging effect after rates are cut if there was no contraction to begin with.