Buying a house as an inflation hedge

Americans are paying far more today for goods and services due to 40-year-old high inflation, a factor that is impacting prices across the board, including for your mortgage and in real estate. Yet even with rising house prices, entering the housing market now could help protect your future against inflation. Here’s how.

How buying a home can hedge against inflation

Buying a home can be a hedge against inflation mainly because:

  • As inflation rises, so should your home’s value.
  • The loan to value ratio (LTV) of your mortgage will decrease as the value of your home increases over time. In other words, your fixed rate mortgage payments stay the same while the equity in your home increases.
  • If you buy a rental property, you may charge higher rent because inflation drives up prices.

“House price appreciation has been a good hedge against inflation, with house prices rising slightly faster than the rate of inflation when measured over a long period of time,” says analyst Greg McBride. chief financial officer for Bankrate. “The recent spike in inflation was preceded by a spike in house prices that insulated homeowners in a way that renters were not.”

The median selling price of a home rose from $329,000 in the first quarter of 2020 to $428,700 in the first quarter of 2022, according to the Commerce Department, an increase of about 30% in two years.

“During the same period, inflation in the United States reached 11.5%,” says Al Lord, founder and CEO of Lexerd Capital Management, based in Summit, New Jersey. “This makes the average house price even [approximately] $68,000 more than at the start of 2020, even after adjusting for inflation.

If you get a fixed rate mortgage, this could also help protect you against inflation. In effect, you will continue to make the same monthly payment of principal and interest while the value of your home increases over time.

Likewise, if you invest in a rental property, you might see higher returns.

“While you own the property, if inflation rates continue to rise, the value of the home and the amount of your rental will also rise,” says Michael Gevurtz, president and CEO of Bluebird Companies, a Philadelphia-based real estate lender. “That means your profit margins will increase over time. As the prices of all goods and services increase, the amount you charge for rent also increases, increasing your return on investment.

Relationship between inflation and the housing market

There is a link between inflation and house prices that has become particularly pronounced in the current economic environment as construction costs and demand have increased.

“Inflation increases the materials needed for building homes and slows the supply of new homes on the market,” Lord says. “When new construction slows, the value of existing inventory tends to increase. Therefore, the increase in demand and the moderation in the supply of housing leads to higher house prices or housing inflation.

In addition, inflation makes it easier to obtain financing for the purchase of a home, because more money is available to lend.

“Because more people can get loans, however, more people are looking for a set number of homes, which drives up home prices,” says Joel Ho, founder of InflationTraining.com, which provides training on inflation. inflation to businesses and individuals.

What is the impact of inflation on mortgage rates?

Discount rate overview

To calm high inflation, the Federal Reserve raises its federal funds rate, which in turn affects the cost of borrowing financial products, including some mortgages. Typically, in times of high inflation, mortgage rates also rise.

“The 2022 mortgage rate spike may be related to the fact that inflation has reached four-decade highs and the Federal Reserve needs to aggressively raise interest rates in hopes of containing inflation,” says McBride, adding that “while homeowners have been insulated from inflation, homebuyers haven’t. Rising home prices and soaring mortgage rates have further reduced affordability for many potential buyers.”

The Federal Reserve has already raised rates three times in 2022 and intends to do so again at the end of July. This indirectly influences fixed mortgage rates, as well as rates for adjustable mortgages and home equity products.

Where is inflation heading?

No one has a crystal ball, but for now many are forecasting above normal inflation rates.

“It’s not yet clear whether inflation has peaked or not,” McBride says. “What started on the supply side, first with pandemic-related supply chain issues and then a war in Ukraine, was also fueled by a low interest rate and policy environment. monetary stimulus. The price of getting inflation under control could well be a recession, and it will take another year or two to bring inflation back to the Federal Reserve’s 2% target.

“There are signs that inflation will moderate to the 5% or 5.5% level by the end of 2023, but that depends on the ability of the Federal Reserve to accelerate interest rate hikes” , says Lord.

“Over the next quarter or two quarters, we will likely see a temporary slowdown with Fed rate hikes,” Ho said. “However, because the federal budget limits the amount of hike the Fed can do, inflation will resume.”

Inflation FAQ

At the end of the line

Despite the inflationary pain, now may still be a good time to buy a home, provided you can afford the mortgage, have a stable source of income, and don’t expect to move during the of the next few years. This will give the property ample time to appreciate, even with the potential for short-term recession bumps.

“If you plan to own the property for at least the next five to 10 years, the value of the property will likely increase,” says Gevurtz.

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