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.
> 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.
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.
> The goal in increasing rates is to cool the economy by reducing construction, i.e. housing starts
That may be a goal, but it isn't the goal. The fed doesn't directly control interest rates on new construction, they control the fed funds rate. Their changes impact the cost for banks to borrow money regardless of the type of loans they underwrite. Increasing rates should decrease demand for new construction, but it decreases demand for existing homes as well. It also negatively impacts employment and many other areas, basically if your run on debt the higher rates hurt.
> 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.
What makes you say that? Lagging effects after a rate cut aren't directly controlled by, or limited by, what effects we currently have - they wouldn't be lagging if the effects must have already happened. More importantly in my opinion, contraction isn't an absolute and requires a baseline for comparison.
After rates are cut we can't distinguish between a contraction relative to where we would have been without intervention. Comparing against a gross number isn't particularly helpful.
For example, say we had a house worth $100k and it was on track to be worth $110k next year. If we intervene and now it will only be worth $105k next year, wasn't that functionally a contraction induced by the intervention even though it didn't fall below the present value of $100k?
> it decreases demand for existing homes as well. It also negatively impacts employment and many other areas, basically if your run on debt the higher rates hurt
The question is not what's affected. It's how much monetary policy it takes to achieve the desired output and employment effect, and where is the employment effect. We want to stop increasing rates once the effect is achieved.
We raise rates because the economy is overheating. Too much money is chasing too few goods, raising prices. In response to the favorable prices, too many jobs are chasing too few workers, raising wages.
Rising prices and wages (without rising productivity) means inflation. We're at one edge of the Phillips curve [1] and need to move back to the middle.
> That may be a goal, but it isn't the goal.
The goal is actually to raise unemployment. That's what the "cooling the overheating economy" euphemism means. However, we don't have the tools to raise it evenly in all sectors. The only tool we have is the short term interest rate.
Luckily, it affects the long term rate, which affects demand for homes, new and existing. For (say) every 20 fewer homes sold, one realtor and one banker might go unemployed. But for every 20 fewer new homes built (say), 50 laborers might go unemployed. That's why the transmission is primarily through construction [2] [3]. The consumer durables sector (appliances) used to have a large multiplier too, but most of those manufacturing jobs have been automated or moved overseas.
> they wouldn't be lagging if the effects must have already happened
You can model the lag effects as geometric decays of the original impulse. You need a negative original effect (one impulse of high unemployment) that will then regress back to baseline (continued but fading unemployment.) We didn't have any impulse, hence no decay.
The only thing that could really go wrong is a resurgence of inflation if the cuts were too fast, but chances are we would have seen that already too.
> relative to where we would have been without intervention
The problem here is we were at too much output/employment. We had to get through that moment and fix the problem without overshooting in the opposite direction.
We couldn't do better, that's the whole point. It's not like there was potentially more output to be had. The actual problem is that output was too high. That's why there was inflation.
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