If you’re waiting for a housing market crash, or a correction in prices that will make your dream home more affordable, the data shows you’re not alone.
Single-family home sales fell for the 10th straight month in November to less than 4.1 million — down 3.5% from the same time last year.
This means more potential buyers are sitting out, likely waiting until interest rates (currently 6.57%) come down, or they’re waiting for some kind of a bust in the housing market akin to the 2008 mortgage crisis.
But, not so fast — have you heard of the “paradox of value,” also known as the "diamond-water paradox"? Here’s where it gets tricky.
The paradox of value is the contradiction that, although water is on the whole more useful than diamonds, diamonds command a higher price in the market because there is much more water than diamonds.
Michael Ashton, an investment manager at Enduring Investments told Barron’s that the current housing market is akin to the paradox of value, here’s what he means.
“If you have the same quantity of a real asset, like houses, and many more dollars, then home prices rise because those dollars are worth less and a house commands more dollars.”
Because housing is a real asset, according to Ashton, a drop in M2 — a gauge of the money supply that includes cash, deposits, and shares in retail money-market mutual funds — would be required before a crash could happen.
The M2 is still very close to record highs even if its rate of growth has significantly decreased, holding at the same level from a year ago.
Some analysts are forecasting a 20% decline in housing prices over the coming year, but according to monetarist theory, price and quantity are equal to money supply times velocity, or the pace at which money is spent.
Accordingly, the 20% drop economists are anticipating would necessitate a 20% decrease in the money supply, all other things being equal. That is highly unlikely, according to Ashton.
If this information dampened your sentiment for the housing market further, don’t stress. Did you know you can invest in rental properties for as little as $100, and make passive income? Benzinga has you covered, check this out.
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