May 17 2022

Is owning a home a hedge against inflation?

Buying a home now is one of the best ways to guard against even higher rates in the future.

Inflation recently hit a 40-year high.† Does this mean you need to put your dreams of homeownership on hold?

While the answer depends on your individual situation—and can best be addressed by a trusted mortgage professional—it can help to know owning a home helps protect against inflation. Though inflation can inflate the price of everything, including real estate, most homebuyers are surprised to hear that homeownership is historically seen to be an effective hedge against inflation.

How buying a home could help you buffer inflation

Consider that:

  • When inflation is high, as it is right now, 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 been steadily climbing.
  • 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 homeowner’s insurance and property taxes) will not increase.
  • This set monthly payment helps you buffer inflation. Even as prices rise—as expected through 2022—you won’t have to worry about changes to one of your biggest expenses: your housing. The actual cost of your mortgage (adjusted for inflation) will decrease as inflation rises.
  • Renting won’t provide the same protection. When you rent, you’re subject to regular rent hikes; as inflation soars, rent prices have also seen record increases. Some cities have seen rent surge by almost 50 percent.

Another way to get ahead of today’s market? Ask a mortgage expert if a rate lock is right for you.

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 and Director of Forecasting for the National Association of REALTORS®, says.

“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.”

It’s true that home prices are still appreciating—and are expected to continue increasing into 2023. And while today’s mortgage rates are rising in an effort to curb inflation, they’re still historically low.

You can see this illustrated in the chart below:

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). Investing in an asset that is expected to increase in value can help to build your prosperity, achieving your dream of homeownership at the same time.

“If you have cash and are expecting inflation, you want to think through where you can put your money so it does not lose value. Housing is commonly looked at as a good inflation hedge…” Ali Wolf, Zonda Chief Economist, says.

It’s important to point out that once you become a homeowner, your monthly payment may stay relatively fixed, but your property value is likely to increase. This means that, for most of today’s new homeowners, you may quickly see a return on your investment.

The average homeowner has gained $64,000 in home equity in the past year. 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 to build prosperity, providing added protection in times of inflation.

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This blog is intended for educational purposes only. Please consult a trusted professional as personal circumstances may vary. MAC523-1481143.