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Here’s how the real estate market is driving cryptocurrencies in 2024
The interaction between these two disparate markets could intensify.
What to do Bitcoin (Bitcoin -2.28%), Solana, Dogemoneta (DOGE -4.10%) and other cryptocurrencies have in common with penny stocks and sports gambling? If you guessed “they are all places where excess capital migrates for the purposes of financial speculation”, you are thinking in the right direction.
But why should investors prefer these risky bets when safer investments like real estate are available? As it turns out, the housing market situation is actually one of the factors pushing money towards cryptocurrencies, at least recently.
A cocktail of problems is driving investors away from homeownership
As you’ve probably heard, the real estate market is exceptionally difficult for buyers right now. But understanding why is critical to appreciating the market’s impact on cryptocurrencies.
Consider this graph.
US core inflation rate data of YCharts.
As you can see, the inflation rate in the US it is still quite high compared to the long-term norm of around 2% per year. In its efforts to bring inflation back down after the post-pandemic surge, the Federal Reserve it quickly raised the federal funds benchmark rate, which determines the interest rates at which banks can lend. It is now at a relatively high level compared to where it has been since the 2008 financial crisis and the Great Recession, when the Fed cut it in an attempt to jumpstart the U.S. economy.
Today’s significantly higher federal funds rate has also pushed up the interest rates that lenders offer to would-be borrowers for mortgages. So, from a consumer perspective, there are several problems with the current state of affairs.
First, even though the current inflation rate has fallen significantly from last summer’s multi-decade highs, previous price increases are still baked into the prices people pay today. This makes everyday purchases, like food, seem prohibitively expensive, and for those whose wages haven’t kept pace, it may be harder to save funds for a down payment on a home. More importantly, even for those who have successfully saved for a down payment (or who already own homes with equity), with mortgage interest rates significantly higher than the past two years, the monthly payment on a loan of any size will be considerably higher than it would have been.
This makes it much harder for homeowners to justify selling their homes to upgrade to a larger dwelling, for example, as their monthly payments will almost certainly skyrocket if they take out their current mortgage any time before 2022 Because people are reluctant to sell if they can avoid it, the number of homes on the market is unusually low.
Now let’s consider this graph.
Median family income in the United States data of YCharts.
Home prices have increased dramatically faster compared to the average family income of recent years. Today, to afford the average home at the current price, a family would need to earn at least $113,500. But the median household income today is about $84,000. So the average buyer can’t afford the average home, and it’s going to take more than an increase or two to change that, given that home prices are still rising and inflation is still marching upward at a pace faster than the Fed would prefer.
It’s easy to see why this situation is causing a sense of sadness on Main Street. Widespread home ownership is one of the pillars of the American economy. When it doesn’t seem achievable, many feel as if… American dream it’s out of reach. And with a national housing shortage estimated at between 4 and 7 million homes, the problem won’t be solved anytime soon.
Even assuming the Fed starts cutting its key rate eventually and market interest rates fall, that will likely drive many would-be homebuyers off the sidelines, creating another hot market where fierce competition among buyers makes resulting in home sales closing at prices dramatically higher than their initial price. prices.
Furthermore, people who do not have access to a safe investment in real estate are missing out on the asset that has been the best financial tool for forced saving and long-term wealth creation. And it is precisely this scenario that has left so much capital free to pour into the cryptocurrency market.
Cryptocurrencies are a one-stop shop for taking risks
What should an investor do with excess capital if his or her income is not enough to swing the cost of a large mortgage?
The most obvious answer would be to invest in stocks and pursue a medium-term wealth creation strategy while accepting a higher level of risk, perhaps focusing on growth stocks. However, this approach, while fully reasonable, seems too slow and unreliable to many people today. Historically the stock market has grown on average about 10% per year. Those who choose a significantly riskier mix of stocks but who are lucky enough to make excellent picks could see their portfolios increase in value by an average of 25% per year.
But growth of this magnitude – which is very rapid and far in excess of what most global investors are able to sustain over time – still does not seem sufficient to ensure home ownership for many people, in part to due to the small amounts of capital they can allocate. In pursuit of their financial goals, they may therefore move further towards the edge of the risk curve. And cryptocurrencies, especially the riskier ones meme coinsthey represent an obvious market to enter in this context.
Bitcoin, with its growth of over 1,130% in the last five years alone, is only a starting point for returns of the desired magnitude. Dogecoin, up more than 5,940% over the same period, may seem like just the ticket for these relatively desperate investors.
Smaller, riskier cryptocurrencies can promise even higher returns over shorter periods, assuming they don’t drop to zero or near zero, as most of them do. Many of these smaller cryptocurrencies are listed on the Solana blockchain, which is currently experiencing a flurry of meme coin investment activity.
Taking huge financial risks can prove spectacular, especially for those who haven’t done it diversified their portfolios in advance. Investing diligently and long-term in stocks or blue chip cryptocurrencies like Bitcoin can almost certainly do more to support a person’s wealth creation goals than many of these new cryptocurrency investors assume.
However, people continue to flock to the more casino-like corners of the cryptocurrency markets, and they won’t stop until they feel their key financial goals are impossible to achieve with a combination of hard work and a more conservative attitude. investment approach.
So remember: as long as housing supply in the United States is strictly limited and mortgages are expensive, it will be a game for cryptocurrencies.