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Why Homeownership Is Your Best Defense Against Inflation
Why Homeownership Is Your Best Defense Against Inflation
In January 2022, inflation in the U.S. hit its highest level in more than 40 years, with prices rising 7.5% from 2021.
In other words, the cost of goods and services like gas, groceries, and energy has increased significantly in a very short period, and Americans are feeling the pinch.
The good news is there’s a way to fight back against inflation if you have some money to invest: homeownership.
And here’s how it works:
How Is Homeownership a Good Hedge Against Inflation?
Over six decades’ worth of data shows that home price appreciation in the U.S. has kept up with or exceeded inflation, especially since the 2010s:
The above graph shows that between 2020 and 2021 home values increased by 8.8% while inflation rose by 5.4%.
Furthermore, looking at the longer-term data, we can see that home prices have kept up with or exceeded inflation in every decade since the ’70s except for the aughts (2000s), which shows a small decline.
Put another way, if you’re worried about the effects of inflation on your purchasing power, buying a home is your best line of defense.
It’s a smart move in an inflationary climate because, as prices for goods and services increase, your mortgage payments will remain relatively stable.
This is especially true in a fixed-rate mortgage scenario, where payments covering interest and principal on the loan are typically the same month-over-month, so homeowners know exactly what to expect.
Not only that, a mortgage allows you to build equity and wealth over time and gives you a place to live that’s relatively immune to the effects of inflation.
By contrast, renters are subject to yearly increases in rent that can be substantial, and the money they spend on monthly rent payments isn’t going toward building equity in a property.
Of course, property taxes and other costs associated with homeownership may be subject to inflationary pressures, but these are typically manageable and predictable.
In short, if you’re looking to protect your purchasing power and build wealth over the long term, buying a home is one of the smartest things you can do.
What’s the Best Way to Invest in Real Estate?
If you’re looking to buy property as an investment or a forever home, there are a few things you should keep in mind.
First, it’s important to remember that not all homes appreciate at the same rate. So, if you’re looking to make money on your investment, it’s important to do your research and buy in an area where home values are predicted to rise.
Second, it’s important to buy a home that you can afford. In an inflationary climate, your income may not keep up with the rising cost of living, so keep some cushion in your budget.
And finally, it’s important to have a realistic timeline for your investment. In most cases, property appreciation takes time, so if you’re looking to make a quick profit, buying a home is probably not the best investment for you.
The Bottom Line
Combating inflation is a big challenge, but if you’re considering buying a home, you’ll be in a good position to weather the storm.
With homeownership, your monthly mortgage payments will remain relatively stable, and your property is likely to appreciate over time, keeping up with or exceeding the rate of inflation.
For help in finding the perfect property, whether it’s a forever home or an investment, reach out to an Elegran advisor today.
