The Federal Reserve’s Housing Market Lessons to Be Learned [Once Again]


The effects of the COVID-19 pandemic were unprecedented in terms of widespread lockdowns, skyrocketing unemployment, and a financial market crash. The Federal Reserve took aggressive expansionary efforts in the form of Zero Interest Rate Policy (ZIRP) and quantitative easing (QE) to stabilize the economy, while Congress enacted massive fiscal stimulus. However, one of the results was a runaway home price boom.

Recently Chairman Powell admitted that the Federal Reserve bore some responsibility for this boom, noting that:

“… the housing market was very overheated for a couple of years after the pandemic as demand increased and rates were low. … the housing market needs to get back into a balance between supply and demand.”

November 2, 2022, FOMC press conference; italics added

It is now generally acknowledged that the Federal Reserve ended up overshooting by not recalibrating its policies in light of both overwhelming fiscal and housing market responses.  Both of these fueled an explosion in aggregate demand, especially for goods and houses.

By the end of August 2020, near-real-time credit card data indicated that sales for July 2020 were up 2% on a year-over-year basis, indicating a recovery from the initial pandemic shock.  By mid-December 2020, these same data indicated that sales for late October 2020 to late November 2020 were up 6% on a year-over-year basis, signaling a policy-induced acceleration of demand. Spending in the lowest two quintiles of zip codes by income was growing at 13% and 9% year-over-year, reflecting the especially large fiscal stimulus for lower-income households.[1]

For the rest of our analysis, read the full report

PDF to full report

[1] In addition, stock and home prices were booming by late 2020.  The ensuing wealth effect, which develops with a lag, should have been well known to the Fed.

EDITORS NOTE: This AEI report is republished with permission. ©All rights reserved.

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