In 2021, inflation was the highest it has been since 1982 at 7%! For the first time in decades, you need protection against inflation!
Inflation in the US is the highest it’s been since 1982! According to the Wall Street Journal,
“US inflation hit its fastest pace in nearly four decades last year as pandemic-related supply and demand imbalances, along with stimulus intended to shore up the economy, pushed prices up at a 7% annual rate.”
For the first time in decades, you need protection from inflation!
The concern about inflation is the sustained upward movement in the overall price of goods and services while the purchasing value of money decreases. Tangible assets like your home consistently become more valuable over time. In inflationary periods, your home is a good investment and a hedge against inflation.
Money in the bank loses purchasing power due to inflation and the interest you may be earning is almost always less than inflation.
Home prices are going up but so is rent. With mortgage rates near historic lows, the interest is, generally, less than the appreciation the property is enjoying. Combine this with the leverage that occurs using borrowed funds to control an asset and your equity is most likely, growing at a faster rate than inflation.
A 90% mortgage at 3.5% for 30-years on a $400,000 home that appreciates at just 4% a year will have an estimated equity of $220,000 in seven years due to appreciation and amortization. That is a 27.5% annual rate of return on the down payment. That is a significant hedge against inflation of 4%. And inflation is currently 7% so the growth is much greater!
If a person were to put that same $40,000 in a certificate of deposit that earned 2%, it would be worth only $45,947 in seven years. If it was invested in the stock market that earned 7% annually, the $40,000 would grow to $64,231. The equity in the example for the home would be almost 3.5 times larger.
The assets thought to be good bets against inflation include some bonds, gold and other commodities and real estate. Another distinct advantage of investing in a home is that you would be able to live there with your family and enjoy it which is not possible with bonds and commodities.
There are certainly other considerations in a comparison like this such as maintenance, but it could be offset, at least partially, by the cost of housing being less than you would be paying for comparable rent. And with the shortage of rental units available, the rent will certainly continue to increase annually where your housing costs are fixed with the exceptions of increases in property taxes and insurance.
McKee Smith, REALTOR®, has been selling and buying homes in Dallas and Fort Worth for many years. He knows and understands the intricacies of the DFW housing market. Remember – McKee has the keys to selling your home!