The problem with understanding markets today is that nobody realizes that there are actually two markets for basically every single good in existence
The first market is the supply demand market for the actual asset. In the case of homes, it would be homebuyers and sellers, and the natural price level will optimize where the most transactions can be executed (p*).
The supply and demand can be affected by many factors, including economic growth, interest rates, labor supply, commodity prices etc.
If the population grows and more people need housing, or if the labor pool shrinks, and few builders are available, prices will adjust to reflect the changes in supply or demand.
But there’s also a second market - the market for money itself.
When the supply of money increases, the excess liquidity spills over and starts to bid up prices in assets and sectors, starting with those closest to the money printer like banking.
Industries that have been financialized to a higher degree like Real Estate will therefore absorb more of the new money creation.
In this case, you could see the excess cash or cheap credit (whichever form it takes) bid up prices in the real estate market without actually seeing fundamental changes to the supply and demand.
The “demand”is being goosed artificially by cheap money.
In such cases, most people incorrectly assume that the fundamental demand is high when in reality it’s the secondary market of money itself that is inflating and driving the price higher.
This is the money illusion.
