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 in September fell to a seasonally adjusted annual rate of 4.22 million — pacing 0.9% slower than the 4.26 million sold in August.
Another staggering stat, single-family home sales last month are down a whopping 23% from September 2021, data issued by the National Association of Realtors shows.
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This means more potential buyers are sitting out, likely waiting until interest rates (currently 7.08%, the highest in 20 years) come down, or they’re waiting for some kind of 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, gaining 1.7% year-over-year in early October as opposed to a 13% surge a year earlier.
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.
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