Homebuying can fight against inflation in 2022: Here’s how | Bankrate.com Article
Written By Erik J. Martin
Americans are paying a lot more today for goods and services due to 40-year high inflation, a factor that impacts prices across the board, including for your mortgage and in real estate. Still, even with home prices up, getting in on the housing market now might help inflation-proof your future. Here’s how.
How a home purchase can hedge against inflation
Buying a home can be a hedge against inflation primarily because:
- As inflation rises, so should the value of your home.
- The loan-to-value (LTV) ratio of your mortgage will decrease as your home’s value increases over time. In other words, your fixed-rate mortgage payments stay unchanged while your home’s equity rises.
- If you buy a rental property, you can charge more for rent as inflation pushes prices up.
“Home price appreciation has been a nice hedge against inflation, with home prices growing slightly faster than the rate of inflation when measured over an extended period of time,” says Greg McBride, chief financial analyst for Bankrate. “The recent spike in inflation was preceded by a surge in home prices that insulated homeowners in a way that renters were not.”
The median sale price for 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 percent in two years.
“Over the same period, U.S. inflation hit 11.5 percent,” says Al Lord, founder and CEO of Lexerd Capital Management, based in Summit, New Jersey. “This makes the average house price still [approximately] $68,000 higher than in early 2020, even after adjusting for inflation.”
If you get a fixed-rate mortgage, that could help safeguard against inflation, as well. That’s because you’ll continue to make the same monthly principal and interest payment while your home’s value climbs over time.
Likewise, if you invest in a rental property, you could see higher returns.
“While you own the property, if inflation rates continue to rise, so will the value of the home and your rental amount,” says Michael Gevurtz, president and CEO of Bluebird Companies, a real estate lender based in Philadelphia. “This means your profit margins will widen over time. As the prices for all goods and services increase, so can the amount you charge for rent, thereby increasing your return on investment.”
Relationship between inflation and the housing market
There’s a link between inflation and home prices that has become especially pronounced in the current economic environment, as both construction costs and demand have increased.