Your home is a tangible asset, which consistently becomes more valuable over time. During times where inflation is significantly high, a home is a good investment and is a hedge against inflation. Why? The interest earned in savings is almost always less than inflation.
Borrowing money, in other words, a loan, can be a great advantage and favorable circumstance during times of high inflation. The rate stays the same over the term of the mortgage and so does the payment instead of going up at the rate of inflation. Which means this can actually be a great time to look into buying a home.
It’s quite simple – purchasing a home allows you to avoid rent increases while enjoying property appreciation, as well as all aspects of home ownership. In September 2022, rents rose by 7.2% according to NAR Chief Economist, Lawrence Yun and “rents are accelerating to higher figures with each passing month.” The annualized rate for this year is 10.6%.
It’s not a secret that there is a housing shortage. That shortage is fueling the price appreciation, as well as the increases many are experiencing in rent. The housing shortage has actually existed for over ten years, due to American home building which has not kept pace with population growth.
When you are repaying the mortgage, you are using dollars that are worth less and less due to inflation. Home Price Appreciation has been close or beaten inflation in each of the past five decades.
| Decade | Home Prices
Average Annual Increase |
Consumer Prices
Average Annual Increase |
| 70’s | 9.9% | 7.2% |
| 80’s | 5.5% | 5.6% |
| 90’s | 4.1% | 3.0% |
| 00’s | 2.3% | 2.6% |
| 10’s | 4.9% | 1.8% |
| 20 + 21 | 12% | 3% |
| 22 | 13.4%* | 8.2% |
*Revised predictions for 2022 home price appreciation are: Fannie Mae estimating 16%; Freddie Mac 12.8%; NAR 11.5%. Average of three projections is 13.4%
The funds for the down payment and closing costs that are sitting idle in a bank, while an otherwise qualified buyer waits to see what happens in the market, are having their value eroded by inflation. At the current rate of inflation, $48,000 would be worth $39,073 in three years. In seven years, it would be worth $29,697.
A 90% mortgage at 6.3% for 30-years on a $400,000 home that appreciates at 4% a year will have an estimated equity of $202,000 in seven years due to appreciation and amortization. That is a 22.8% annual rate of return on the down payment plus $8,000 closing costs. That is a significant hedge against a current inflation of 7.1%.
A leverage is produced in the mortgage for the homeowner to enjoy the benefits as the value of the home goes up while the unpaid balance goes down with each payment made due to amortization.
Most renters have experienced significant increases in their rent – in some cases, those prices have doubled or even tripled. Each day, a renter who is otherwise qualified to purchase a home, is faced with a decision to continue renting or buy a home. Renters will ultimately be facing an increase in their rent, feeling an erosion of the purchasing power of their funds, and experiencing an opportunity cost by not benefitting from the appreciation and amortization benefits of buying a home.
Let’s connect and talk about what opportunities are available now and options that could benefit you, even considering the volatile economic atmosphere we’re all facing.
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