Here’s How the Housing Market Is Driving Cryptocurrencies in 2024

What do Bitcoin (CRYPTO: BTC), Solana, Dogecoin (CRYPTO: DOGE) and other cryptocurrencies have in common with penny stocks and sports gambling? If you guessed that “These are all places where excess capital migrates for financial speculation”, you are right.

So why would investors choose these risky bets when there are safer investments such as real estate? It turns out that the situation in the real estate market is actually one of the factors driving money into crypto; At least it has been so lately.

A number of problems prevent investors from becoming homeowners

As you’ve probably heard, the housing market is extremely difficult for buyers right now. But understanding why is key to appreciating the market’s impact on cryptocurrencies.

Consider this table.

US Core Inflation Rate Chart

As you can see, the inflation rate in the US is still a bit high compared to its long-term norm of around 2% per year. In efforts to reverse inflation from its post-pandemic rise, the Federal Reserve has sharply increased the benchmark federal funds rate, which determines the interest rates at which banks can lend. It is currently at a relatively high level since the 2008 financial crisis and the Great Recession, when the Fed throttled it in an attempt to boost the U.S. economy.

Today’s very high federal funds rates have also pushed up the interest rates lenders offer to mortgage borrowers. Therefore, from a consumer perspective, there are various problems with the current situation.

First, although the current inflation rate is down significantly from last summer’s decades-long highs, previous price increases are still reflected in the prices people pay today. This causes everyday purchases like food to become prohibitively expensive, and for those whose salaries can’t keep up, saving money for a down payment on a house can be more difficult. More importantly, even for those who have successfully saved for a down payment (or are already homeowners with equity), the monthly payment on a loan is getting higher as mortgage interest rates are much higher than they were until the last few years. The size on any given dimension will be noticeably higher than it should be.

This makes it much more difficult for homeowners to justify selling their home to upgrade to a larger residence; For example, if they withdraw their current mortgage any time before 2022, their monthly payments will almost certainly skyrocket. Because people hate selling. If they can avoid it, the number of homes on the market is unusually low.

The story continues

Now consider this table.

US Median Family Income Table

House prices have risen much faster than the average family’s income in recent years. Today, to afford the average home at its current price, a family would need to earn at least $113,500. But today the median household income is roughly $84,000. So the average buyer can’t afford the average home, and it’s going to take more than a price hike or two to change that, because home prices are still rising and inflation is still marching upward at a faster rate than the Fed would prefer.

It’s easy to see why this situation has caused pessimism on Main Street. Widespread home ownership is a pillar of the U.S. economy. When it doesn’t seem achievable, many people think the American Dream is unattainable. And given the national housing shortage, estimated at between 4 and 7 million homes, the problem isn’t going to be solved anytime soon.

Even assuming the Fed eventually begins lowering its benchmark interest rate and market interest rates fall, this will likely push many eager homebuyers off the sidelines and create another hot market in which fierce competition among buyers will cause home sales to close at prices significantly higher than initial listing prices. Price:% p.

Moreover, people who do not have access to safe-haven investment in real estate are missing out on the asset that is the best financial tool for forced savings and long-term wealth creation. And it is precisely this scenario that has enabled so much capital to flow into the cryptocurrency market.

Crypto is a one-stop shop for risk-taking

What should an investor do with excess capital if their income is not enough to cover the cost of a high mortgage payment?

The obvious answer would be to invest in stocks and pursue a wealth-building strategy over the medium term, accepting a higher level of risk, perhaps focusing on growth stocks. But this approach, although completely reasonable, seems very slow and unreliable to many people today. The stock market has historically grown at an average rate of 10% per year. Those who choose a significantly riskier mix of stocks but are lucky enough to make excellent choices may find their portfolios compound annually at an average of 25%.

But growth of that magnitude — which is very rapid and much higher than most blue-chip investors can sustain over time — still doesn’t seem to be enough to secure homeownership for many people. the small amount of capital they can allocate. Therefore, they may move towards the edge of the risk curve as they pursue their financial goals. Cryptocurrencies, especially the riskiest of the meme currencies, are an open market to enter in this context.

With growth of over 1,130% in the last five years alone, Bitcoin is just a starting point for returns of the desired scale. Dogecoin, which is up over 5,940% in 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 of time, provided they don’t drop to or near zero like most. Many of these smaller coins are listed on the Solana blockchain, which is currently experiencing a flurry of meme coin investment activity.

Taking big financial risks can backfire spectacularly, especially for those who haven’t diversified their portfolios beforehand. Diligent, long-term investing in stocks or blue-chip cryptocurrencies like Bitcoin can almost certainly do more to support a person’s wealth-building goals than many of these new crypto investors assume.

Yet people continue to flock to the casino-like corners of the cryptocurrency markets, and they won’t stop as long as they find it impossible to achieve their basic financial goals through hard work and a more conservative approach. investment approach.

So remember: As long as housing supply is tightly constrained and mortgages are expensive in the US, the game will be on for cryptocurrency.

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Alex Carchidi has positions in Bitcoin and Solana. The Motley Fool has positions in and recommends Bitcoin and Solana. The Motley Fool has a disclosure policy.

Here’s How the Housing Market Is Leading Cryptocurrencies in 2024 Originally published by The Motley Fool.