Hedge Against Inflation With Real Estate

Today I'm going to tell you about what I believe to be, the best hedge against inflation, and the best way that you can protect yourselves from the current rising costs of everything.

Welcome back to another real estate market update!  I’m Erik Braceland with Braceland Homes here in sunny San Diego, California, where we guarantee the sale and/or purchase of your home.  Here on the Braceland Homes Blog we cover topics related to buying and selling residential real estate, and trends happening across the housing market.  Please consider subscribing to our channel so you can be updated and ready to go with all the latest knowledge headed into each weekend.

Prices are going up on everything, and as we see prices rise around us at the gas pump, the grocery store, and the car dealership, we also know that homeownership costs are certainly not immune to that in any way, nor are home rental rates. And I want you home buyers out there to really pay special attention to this episode.  We'll talk about rising rent in a bit, but one of the things I really want to focus on, is how locking in your fixed monthly housing cost, probably the biggest cost that you have...and locking that housing cost in at today’s price, and why it's so beneficial to safeguarding you against that inflation and those rising costs all around us.  We want to hedge against inflation, with real estate.

I want to help you understand how to beat inflation.  We'll begin with a quote from Investopedia. It says, “Real estate is one of the time-honored inflation hedges. It’s a tangible asset and those tend to hold their value when inflation reigns, unlike paper assets. More specifically, as prices rise so do property values.”  What we can see here is that homeownership is one of those costs or expenses that you can lock in today. It’s an asset that’s increasing in value over time. And as prices rise, and home values rise, and prices on everything else rise around us...locking in that one, really large, fixed expense of housing is really a game-changing hedge against inflation tomorrow.

This visual shows how homeownership outperforms inflation over time. This is homeownership as a hedge against inflation, and I want to break it down for you so you can really see what we’re talking about here. This is home price appreciation versus the consumer price increases over time, and it goes all the way back to the 1970s. Now the blue bars are the average inflation rate for the decade, and the green bars are the average home price appreciation for each of those decades. Let’s look at the 1970s to start. Inflation increased at 7.1 percent in that decade, and home values appreciated at 9.9 percent in that same time period. So, homeownership outperformed inflation. And where do you want to be in inflationary times? In an asset that’s outperforming inflation! Now in the 1980s it was a little bit more balanced with 5.6 percent inflation, and 5.5 percent home price appreciation.  Look at the ‘90s. We start to see home values rise again a little bit more, outperforming inflation throughout that decade.  Now you probably know the 2000s were very different. Home prices performed at a very different rate than what we’ve seen in many other decades, and even what we’re seeing today, and potentially tomorrow. We also had a fundamentally different housing market. We had the oversupply of homes, and lending standards that were vastly different than they are today. Homeowners also didn’t have the equity that they have in their homes right now. A fundamentally different housing market, where home prices did not outperform inflation in the 2000s. But look at the 2010s.  This is where home values really started to kick in.  Homes started appreciating much faster than inflation. 4.9 percent versus 1.8.  And then 2020 and 2021, you know what’s happened with the housing market here; massive home price appreciation!  A drastic difference here, where home values outperformed inflation.

 

So over time what you can see, is that you can hedge against inflation with real estate, because the rise in home values, generally outperforms the rate of inflation. That means that if you buy a home today, you can lock in today’s cost, and hedge against inflation with your new real estate and fixed mortgage rate. In this scenario, your housing costs are now fixed for the term of the loan, probably the next 30 years. Now, this becomes really important when we start to talk about renting, because renting takes on the risk of rising rental prices year after year after year.  I’ve shown you that data in the past, if you’ve been following along with me.  Rental prices are truly skyrocketing.  Would you rather assume 30 years of price increases, or pay the same monthly payment for the next 30 years?  Seems like a really simple question to answer.  Now I know there are special circumstances why someone might take the former over the latter, but for me, I'll take the security of that fixed payment every time!  Set it...and For Get It!  Anyway, if you are enjoying these insights so far, please let me know in the comments below.

So, let me share a quote with you here, from Bankrate, that’s really powerful for renters. It says “A fixed rate mortgage allows you to maintain the biggest portion of housing expenses at the same payment. Sure, property taxes will rise and other expenses may creep up, but your monthly housing payment remains the same.” That’s certainly not the case if you’re renting, and that’s because rental prices rise year after year.  This becomes really powerful for some of you that might be thinking "I could buy today, but I’m just gonna press pause, and I’m going to wait. I’m going to wait and see what happens to home values. I'll wait to see if they drop, or if they rise." Well, all the forecasts that we’ve seen show that home values are projected to continue rising.

We also know that mortgage rates are projected to keep rising, and we know that rental prices are rising. What does that mean at the end of the day? Two things really.  One, someone who continues to rent, but could buy, is taking on the additional increases in rent year after year.  Two, it’s going to cost more to buy a home down the road. So really important for you renters to understand this dynamic, and I think this next visual really helps show how rental prices compare to inflation rate. 

This shows that rent increase has been greater than inflation in most years, so let me break it down again.  Rental price appreciation versus core inflation rate, again, going all the way back to the ‘70s. So your blue line is that core inflation rate, and your green line is rental price appreciation, and what do we see on a whole? The green line higher than the blue line in most scenarios, meaning that rental prices have increased at a faster rate than inflation in most times. Yes, there’s some ticks down below that blue line; however, that means it’s more expensive to rent over time because rental prices are continuing to rise faster than the rate of inflation. So no pressure, but you really do want to buy a home now, if at all possible, to avoid those increasing costs for rent and inflation all around us.

So, is real estate a good hedge against inflation?  I think this really kind of brings it home for us.  This is from Forbes, - it says, “Homeowners are shielded from mounting rental prices because their cost is fixed, regardless of what’s happening in the housing market."  Like we talked about, you’re locking in that payment at today’s cost.  They go on to say, "Tangible assets like real estate get more valuable over time", and you’ve seen that in the graphs and the data that I’ve shown you, "which makes buying a home a good way to spend your money during inflationary times." Well said.

I really wanted to write this now, because I realize we're all struggling with the prices of everything spiraling out of control, and I know that this is one way to take some of that control back, over probably the largest monthly payment that most of us have to make.  I hope you found this helpful.  Please let me know what you think of this strategy to combat inflation.  Do you also believe that real estate is a great hedge against inflation?  And do you have any other ideas on how to beat inflation?  Please share with the group in the comments below so we can all learn from each other, and make the most of our current circumstances.

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That's all for now.  I'm Erik Braceland, and thanks once again for stopping by the Braceland Homes Blog.  Thank you for increasing your financial literacy and considering real estate as a way to make things happen for you and your family.   I'll see you right back here real soon!