When interest rates are kept extremely low, people can afford to take on more debt, because the monthly payments cost less. As a result, sellers increase their prices.

This is one of the reasons the real estate market crashed so hard in 2008. Following the September 11, 2001, terrorist attacks, the Fed kept interest rates low, encouraging people to take on higher-than-usual levels of debt, especially in the real estate market. //

Rather than learn its lesson from the 2008 crash, the Fed doubled down on this failed strategy, and then tripled down during the Covid-19 response. Congress and the White House were all too willing to cheer the Fed on, since lower interest rates have helped them expand government programs without begging foreign governments to finance U.S. debt.

As a result of these policies, a shockingly large price bubble appears to have formed in the real estate market. The average sales price of a home in the fourth quarter of 2021 was $477,900, compared to $403,900 in the fourth quarter of 2020 and $384,600 in the fourth quarter of 2019. That’s a $93,300 increase in just two years, by far the biggest increase ever recorded in just 24 months. //

However, there is a chance that housing prices will not drop, or only drop minimally. If the Fed decides to continue to keep interest rates low, despite the ongoing inflation crisis, it might prevent a real estate crash the size and scale of the one discussed above. It will come at a cost, though — more inflation, even bigger market distortions, and perhaps the collapse of the dollar.

Regardless of what the Fed does in the short term, it’s clear that America’s disastrous monetary-policy chickens are coming home to roost. Prepare accordingly.