Jun 20 2023

Does owning a home really hedge against inflation?

Is owning a home a hedge against inflation?
Is owning a home a hedge against inflation?

Homeownership doesn’t just help build your prosperity. It can also be a hedge against inflation.

After multiple rate hikes from the Federal Reserve, we’re finally seeing signs of deflating inflation. Is this the time to buy a house, or should you wait? It's true that inflation can increase the price of everything, including real estate. But becoming a homeowner can have a protective effect, helping to hedge against inflation.

How buying a home could help you buffer inflation

Consider that:

  • When inflation is high, prices rise with it. You may be feeling the crunch when paying for food, gas, entertainment, and many other services. Rent and home prices have also risen.
  • Buying a house offers a form of protection. Once you become a homeowner, you’ll typically lock in a set monthly mortgage payment that (save for some fluctuations related to the monthly cost of home insurance and property taxes) will not increase.
  • This set monthly payment helps you hedge against inflation. Even as prices rise, you won’t have to worry about changes to one of your biggest expenses: your housing.
  • Renting won’t provide the same protection. When you rent, you’re subject to the effects of inflation in the form of rent hikes. U.S. Census Bureau data confirms that rents have been trending upward for almost four decades.

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Housing is the largest of the eight main components making up the Consumer Price Index (CPI) that is impacted by inflation.

“...Remember that housing is considered a hedge against inflation, since home values and rents also increase when inflation is moving up,” Nadia Evangelou, Senior Economist for the National Association of REALTORS®, said. “Moreover, once homebuyers lock in their mortgage, they are able to pay off their mortgage with money that is worth less than it was when they borrowed it since inflation decreases the value of each dollar.”

Currently, nationwide home prices are still appreciating. Prices are expected to continue increasing into 2024. And while today’s mortgage rates have risen from their lowest points in the pandemic, they remain below the historical average.

A house will cost more today than it would have a year ago because of higher rates and home prices. But investing in a home now, if you’re financially prepared to do it, gives you the chance to lock in a monthly mortgage payment before rates and prices rise again.

This is fairly standard financial advice during periods of inflation (though it’s always important to speak with your financial advisor). Historically, home price appreciation has typically outpaced inflation. Investing in an asset that’s expected to increase in value can help build your prosperity, achieving your dream of homeownership at the same time.

Inflation may make you more likely to own a house

Living through times of high inflation may put you on the path to homeownership, recent Berkley research suggests.

“…People who have lived through a lot of inflation like to hedge themselves by putting money into a real asset. If this has been your experience, and you’re choosing whether to rent or buy a home, you might opt to buy,” Ulrike Malmendier, Berkeley Haas professor and study co-author, explained.

Inflation’s impact on homebuying behavior holds true in and outside of the U.S. As the study authors noted, countries that experienced greater levels of inflation had higher homeownership rates compared to countries with more financial stability.

Once you become a homeowner, your monthly payment may stay relatively fixed, but your property value is likely to rise. This means that for most of today’s new homeowners, you may see a quicker return on your investment.

In the past year, the average homeowner has gained $14,300 in home equity. The average homeowner also has a net worth of more than 40-times that of a renter, according to the latest available numbers. These numbers simply underscore how homeownership can help build prosperity, providing added protection in times of inflation.

To sum up: If you’re concerned about rising costs, as many consumers are, buying a home might prove to be helpful as a long-term hedge against inflation. As the Fed works to get a handle on inflation, there might also be relief in sight. Cooling inflation could help to calm mortgage rates. If and when mortgage rates drop, homebuying affordability will only get better.

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