Can You Benefit During Inflation?

Buying a Home can benefit during times of inflation

Benefit during inflation? Most people believe that inflationary periods only bring negative impacts. However, homeownership benefits you during these periods and helps offset these negative trends.

Negative Impacts of Inflation

In inflationary times, (currently the highest in 40 years), the purchasing power of your money diminishes each day. This means that your money essentially, buys you less. The biggest threat during this period is to be without capital assets. Capital assets, such as a home, benefit you from the increase in prices in the housing market.

Your money buys less gasoline now, than it did a year ago, by close to 50%. Beef prices are up about 20% since last year. Used cars are about 35% more expensive than they were a year ago. Mortgage rates are near 5% after reaching their lowest of 2.65% in January 2021.

And then, there is the price of houses. CoreLogic reports that home prices increased year over year by 20% in February 2022. Their Home Price Index indicates an annual five percent increase in prices from 2014 to 2021.

Adjust for the Long Term

However, if you choose to invest in a home, you can reap a benefit of inflation. This can offset losses you experience otherwise. If you are now priced out of your “dream house,” consider a different tactic. Adjust your expectations for the perfect home make it a long-term strategy. Start by purchasing a “less perfect” but affordable property. You delay the gratification of getting everything you want in a home now. But the compromises you make would allow you to “stair-step” your way into the “forever home” and incrementally reach your goal.

Benefit During Inflation

Owning a home in today’s market, even if it isn’t the ultimate home, provides a significant hedge against inflation. Not only is the home appreciating faster than the rate of inflation, the mortgage on the home produces leverage that increases a homeowner’s return on their equity. Homeowners have both the home’s appreciation and its amortization working in tandem to increase their equity. Money in a bank account or the stock market can’t compare to the potential.

Choosing to Invest in a Home

$40,000 invested in a certificate of deposit earning 1% would be worth $42,040 in five years. If the same amount was invested in the stock market that earned 6% annually, it would be worth $53,529. However, if the $40,000 were invested in a $400,000 home, with a mortgage at 5% for 30 years, that appreciated at 5% annually, the equity would be close to $180,000 at the end of the same five-year period.

Connect with us at (510)-244-0081 and let’s put together a plan to help you benefit from inflation.