Homeownership Is a Great Hedge Against the Impact of Rising Inflation
How Does Inflation Affect Home Prices?
How is Inflation Going to Affect Your Home Buying Plans
If you’re following along with the news today, you’ve heard about rising inflation. The Consumer Price Index jumped 1.0% in May, April was lower at 0.3%, and February was 0.8% – it does fluctuate and we’re all waiting for it to decrease more than increase. This brings the total increase to 8.6% over the last 12 months.
“Consumer prices accelerated again in May as shelter, energy and food prices continued to surge at the fastest pace in decades. This marked the third straight month for inflation above an 8% rate and was the largest year-over-year gain since December 1981.”
With inflation rising, you’re likely feeling it impact your day-to-day life as prices go up for gas, groceries, and more. These climbing consumer costs can put a pinch on your wallet and make you re-evaluate any big purchases you have planned to ensure they’re still worthwhile.
If you’ve been thinking about purchasing a home this year, you’re probably wondering if you should continue down that path or if it makes more sense to wait. While the answer depends on your situation, here’s how homeownership can help you combat the rising costs that come with inflation.
The Inventory Issue
Interest rates have been kept low for so long it’s affecting everything and not just the housing market. There’s inflationary pressure on the housing market because of limited inventory. Limited inventory stems from a myriad of problems in the industry.
First, many homeowners weren’t putting their houses on the market. This is due to factors like the lockdowns, but also the fear they won’t be able to find a new home to buy.
Inflation is a reference to a rise in the price of everyday goods. Those everyday goods are used to build homes. If the price of things like lumber and appliances go up, then the builder will pass those additional costs onto the buyer in the form of higher prices. New home prices have increased substantially over the last few years plus there are construction delays due to supply chain bottlenecks.
Low inventory means buyers were often having to put in bids well above asking to get properties, creating a frustrating situation, to say the least. These over-bid situations have eased the last few months as more inventory has come onto the market and interest rates have increased, pricing some buyers out of the market for now.
People are still buying although they may have to lower their purchase price and mortgage. The average mortgage has decreased to about $413,000, down 10% over the last few months.
Homeownership Helps You Stabilize One of Your Biggest Monthly Expenses
Investopedia explains that during a period of high inflation, prices rise across the board. That’s true for things like food, entertainment, and other goods and services, even housing. Both rental prices and home prices are on the rise. So, as a buyer, how can you protect yourself from increasing costs? The answer lies in homeownership.
Buying a home allows you to stabilize what’s typically your biggest monthly expense: your housing cost. When you have a fixed-rate mortgage on your home, you lock in your monthly payment for the duration of your loan, often 15 to 30 years. James Royal, Senior Wealth Management Reporter at Bankrate, 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.”
So even if other prices increase, your housing payment will be a reliable amount that can help keep your budget in check. If you rent, you don’t have that same benefit, and you won’t be protected from rising housing costs.
Investing in an Asset That Historically Outperforms Inflation
While it’s true rising home prices and higher mortgage rates mean that buying a house today costs more than it did even a few months ago, you still have an opportunity to set yourself up for a long-term win. That’s because, in inflationary times, you want to be invested in an asset that outperforms inflation and typically holds or grows in value.
The graph below shows how the average home price appreciation outperformed the average inflation rate in most decades going all the way back to the seventies – making homeownership a historically strong hedge against inflation (see graph below):
So, what does that mean for you? Today, experts forecast home prices will only go up from here thanks to the ongoing imbalance of supply and demand. Once you buy a house, any home price appreciation that does occur will grow your equity and your net worth. And since homes are typically assets that grow in value, you have peace of mind that history shows your investment is a strong one.
That means, if you’re ready and able, it makes sense to buy today before prices rise further.
Don’t Let Rising Inflation Delay Your Homeownership Plans
In a related topic, everywhere you look, experts are warning we could be heading toward a recession, and if true, an economic slowdown doesn’t mean homes will lose value. View the related article for more details.
That’s the one thing that every homeowner today needs to know. History Shows That in Most Recessions Home Values Increased
- If recent headlines about rising inflation are making you wonder if it’s still a good time to buy, here’s what experts have to say.
- Housing is an asset that typically grows in value. Plus, your mortgage helps stabilize your monthly housing costs, and buying protects you from rising rents.
- Experts say owning a home is historically a good hedge against inflation. Let’s connect if you’re ready to start the homebuying process today.
If you’ve been thinking about buying a home this year, it makes sense to act soon, even with inflation rising. That way you can stabilize your monthly housing cost and invest in an asset that historically outperforms inflation. If you’re ready to get started, let’s connect so you have expert advice on your specific situation when you’re ready to buy a home.
RELATED POSTS for More Market Trends
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