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The Crypto-Crash & Housing Market Cooling
I’ve highlighted in recent weeks the lightening pace that interest rates have increased. This is creating a new normal for real estate but we don’t yet know exactly what that new normal will look like. Could that new normal include a softening or a cooling of the housing market? Very possibly. Realtor.com reports that the inventory of homes for sale nationwide increased in May for the first time since June of 2019. Additionally, in the same month more new listings entered the market than any month since June 2019. We also saw in the month of April that the number of new homes sold was sparingly low. Anecdotally in conversations with realtors in the area, everyone I have spoken with in recent weeks notes that they can sense a change in the air. In some instances, more expensive houses are not selling within hours like they were before. In other instances there are lots of showings, but offers are not coming as quickly.
Are we at a turning point in the market? This may be premature to say, but I think so. But that begs the question, a turning point toward what? My best guess is that the housing market is beginning the process of softening in the short-term. Because the supply of homes remains so far behind the demand, I think the chances of a housing crash appear to be miniscule based on what we know now. We also haven’t had credit available at the same levels we had in 2008 bidding the price of homes up and in turn leading to that particular housing crash. Thus, I think softening or a slow and slight downtick in prices is a more likely scenario. Why do I think this? Because I think that higher rates coupled with record prices in most parts of the country will lead to fewer buyers. Let me put it this way: let’s say your current mortgage is at 3%. Would you be willing to move across town for a more expensive home and higher cost mortgage in the 5% range? Some of you will say yes, but many of you will say no. For those who don’t have to move, they will be less likely to move. We’ll keep an eye on the new housing normal and keep you posted along the way.
Another asset class in the process of finding it’s new normal is the crypto currency space. As the move in interest rates has taken place, crypto has taken it on the chin. Perhaps the most notable has been the fall of USD Terra, a stable coin whose goal was to have its value pegged to the dollar. Theoretically, this was supposed to keep the value of one USD Terra at $1. But as of yesterday, a USD Terra Stablecoin was worth $0.02. Stablecoin is a particular type of crypto currencies that is pegged to a particular asset – supposedly making them a more stable crypto. But the meltdown of USD Terra is calling into question whether stability is even possible with cryptocurrency. As with any asset, when everyone runs for the exit simultaneously, the price drops, causing more people to run for the exits. Thus most cryptocurrencies’ value is held up by investors’ confidence. This can cause these assets to increase in value exponentially when confidence is high. It can do just the opposite when confidence begins to fall. Even one of the oldest and most widely help crypto currencies, Bitcoin, has experienced nearly a 40% drop from late March to Mid-May. That being said, Bitcoin enthusiasts would encourage us to look at the longer-term trend, including the fact that it has grown by 1000% if you look back 5 years. The reality probably is, much like the early days of the .com bubble, many cryptos won’t make it but a few probably will. For every thousands of .coms that went bust, there was a Google and an Amazon that were going to make it and make it big. The challenge is being able to tell which ones are going to be the survivors. I can remember back in 2004 when Google had its initial public offering, I had the chance to buy Google at $150. My thought was “who would pay that much for a search engine?” At the time I could not see how a search engine would eventually so imbed itself in our culture. So much so that we now we use Google as a verb for searching for something on the web. You know you’ve become ubiquitous when your company name becomes a verb. My point is there will likely be winners in this crypto space – but since it feels a little like the wild wild west, it’s incredibly hard to see who those winners will be. Much of this will be determined by the regulatory posture toward these asset classes.
Along those lines Senator Cynthia Lummis presented a crypto bill today that she has been working on for some time, with a goal to “fully integrate digital assets into the financial system.” Her plan includes putting crypto under the authority of the Commodities & Futures Trading Commission instead of the SEC – classifying crypto more like a commodity than a security. Legislative debates will begin and where they end up will have a big impact on the future of crypto. Just remember that any asset is only valuable if other people consider it to be valuable. This is the case whether you are talking about crypto, or land, or dollars. As a matter of fact, the reason the US dollar has remained the reserve currency of the world is that the world has more faith in the backing of the US government than it has of any other entity or currency on Earth. If the global economy’s perception of this changes or weakens, then the value of the dollar will go down. But in order for this to happen, there has to be a stronger alternative. Every single day we store our value in some kind of asset, whether that be crypto, a bank account, our houses, or land. Will crypto become a more common store of value for the future? This story continues to be written.
Perhaps you were thinking about buying a house, but now that interest rates have moved up, you’re not too sure. Maybe you could use some help crunching numbers and making a decision. At MBC/Foundation Bank, we offer more than money, we offer advice. We love sitting down with people and offering them objective council on their financial decisions. If you are looking for a trustworthy guide to help you borrow well, we can help. Start your financial conversation with us today by contacting your local branch. If you’ve found this podcast helpful, please remember to share it and subscribe on your favorite podcasting app. And until next time, God bless you.
-President Chad P. Wilson, CFP
Today’s episode of “Money Matters” was written and recorded by President Chad P. Wilson of McKenzie Banking Company / Foundation Bank on June 7, 2022. This episode does not constitute financial advice. Please consult a financial professional to discuss your specific needs. MBC/Foundation Bank is an Equal Housing Lender, Member FDIC.