Homeownership in 2022

Homeownership: A Hedge Against Inflation

According to Mark P. Cussen, financial writer of Investopedia, “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.” Homes are an asset that is increasing in value over time. As home values rise and all other prices rise around us, locking in a fixed cost like homeownership is game-changing as a hedge against inflation tomorrow.

What is a Hedge?

A hedge is an investment that is made to reduce the risk of adverse price movements in an asset. Normally, a hedge consists of taking an offsetting or opposite position in a related security. If we look at home price appreciation versus the consumer price increases over the decades, you can see how historically overall, appreciation increases at a higher rate than consumer prices. The light gray bars on the graph below represent the average inflation rate, and the cabernet bars reflect the average home price appreciation for each of those decades as well. We see that over the past 50 years or so, home prices increased at a higher rate than inflation. Now with inflation at a 40-year high, a sound and fixed investment in your future makes a home purchase that much more sensible.

Hedge Fund Against Inflation

A Hedge Against Inflation

Buying a home today can lock buyers in at today’s rates and protect themselves against the rising cost of inflation against the most expensive payment, housing. 

According to James Royal, Senior Wealth Management Reporter of Bankrate

“A fixed-rate mortgage allows you to preserve 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 are renting.” 

Though homeownership provides resiliency and some level of protection against inflation, those who are renting do not have those same protections. Someone who could buy, but continues to choose to rent, is not only looking to be at the mercy of the supply and demand of rentals in their local area, but as interest rates continue to rise, so does the cost to buy a home down the road. The shortage of homes that we are seeing all across America has been historically low, alongside elevated buyer demand, causing drastic home value increases. As the home values and interest rates rise, buyers may not be able to purchase the home they want, particularly first time homebuyers. This inability to purchase a home then drives them back to the rental market.  

Natalie Campisi, Advisor Staff at Forbes further explains this concept, stating, 

“Homeowners are shielded from mounting rental prices because their cost is fixed, regardless of what’s happening in the market… Tangible assets like real estate get more valuable over time, which makes buying a home a good way to spend your money during inflationary times.”

Mortgage Rates

Homeownership in 2022: Mortgage Rates

As economic recovery continues into the spring and summer, mortgage rates are expected to resume their upward trajectory. In the meantime, recent data suggests that homebuyer demand continues to be elevated as supply remains low, driving higher home prices. A positive jobs report hints to the Fed taking action and raising the Fed funds rate in March, so expect to see rates go up. 

Sam Khater, Chief Economist of Freddie Mac, states, 

“As mortgage rates rise, we do expect some moderation in housing demand, causing house price growth to temper. However, the combination of a large number of entry-level homebuyers facing a shortage of entry-level inventory of homes for sale should keep the housing market competitive…” 

Khater expects a shrinking refinance market and purchase originations are predicted to grow from $1.9 trillion in 2021 to $2.1 trillion in 2022. While the rates are going up, they are still favorable financing compared to historical rates. For this reason, it is important to keep your pulse on the ever-changing market. Luckily, at Berkshire Hathaway HomeServices Coastal Real Estate, we stay knowledgeable engaged with all the factors that influence and affect the buyers and sellers of our market. 

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