What would it have taken for the Federal Reserve to prevent the housing debacle of the last decade?
Apparently, 8 percentage points of increases in the key short-term interest rates the Fed controls, starting way back in 2002.
That’s the conclusion of a recent study by researchers at the Federal Reserve Bank of San Francisco.
It’s not just a history lesson, as the economy struggles again with steep housing costs. Please don’t forget, the last time the nation got housing policy wrong – just a decade ago – the nation plunged into its darkest economic period since the Great Depression.
The study’s authors – Òscar Jordà, Moritz Schularick and Alan Taylor – do admit to several caveats. Like there isn’t simple data to make easy comparisons. So they used a century and a half of international interest rate and economic data, then layered those trends over more modern U.S. data.
Still, the San Francisco Fed researchers found the U.S. suffered unprecedented housing overvaluation in the last decade – 39 percent more than the norm by 2006, based on a post-World War II ratio of house prices to income.
