Real Estate Is An Inflation Hedge
For people who are seeking alternatives to stocks and bonds to hedge against inflation, look no further. Real estate may be the best investment to provide a hedge against inflation, although there is still risks present with this strategy. The hunt for safe haven assets continues into 2022, as everything from milk, to stocks, to real estate has increased in price substantially. With inflation hovering around a 40 year high and the Federal Reserve looking to step in to stomp it out, there are risks coming to assets in every corner. After being considered the best investment in the U.S., real estate is also considered one of the best hedges to inflation, as well as higher interest rates. Here is why real estate is an inflation hedge.
Why Real Estate Is An Inflation Hedge
Real estate is considered one of the best asset classes during periods of high inflation. The asset class typically has little correlation with stocks and bonds, making them more attractive to investors. Investors and homeowners tend to enjoy the real estate assets, even when the market is hot as prices haves skyrocketed due to low supply and low rates. Inflation impacts the real estate market, as there is no asset class that is safe during easy monetary policies. That being said, the Federal Reserve’s actions will also not immediately impact the markets, meaning inflation may run hot for longer. This is creating the age old question, what to do with my savings?
Experts are beginning to predict that buying real estate, even in one of the hottest markets in years, is a good bet against inflation. While it may seem mundane to buy a home with prices up 17% in a year, real estate prices generally trend up. Not to mention, mortgage rates are still low, although they are creeping up. With mortgage rates still being low, your buying power remains higher, even as the assets are bid up in price.
Real Estate And Inflation
With an outside view of the real estate market, it is assumed that inflation and real estate are not correlated. Inflation is a consumer product based price increase, with housing based on demographic trends and supply/demand coefficients. However, in the long term, inflation and real estate tend to both move in the same direction. With wages generally increasing in times of inflation, as well as interest rates, inflation and housing tend to trend up together. When inflation is bad enough to increase wages, budgets are inflated for renting and buying. Inflation is wildly abundant in low rate environments, as we are currently experiencing. When borrowing is cheap, money is easy to access. With money easier to access, and higher wages, more people are able to buy, decreasing supply and increasing prices.
Many economists and professors who study real estate and market trends see a link between inflation and housing prices. With wages increasing to keep up with rising costs, there is said to be a clear link between real estate prices and inflation. On average, over the past 100 years, housing prices have generally increased with the rate of inflation. In fact, in developed countries, real estate prices have actually superseded to rate of inflation by 2-3%. With inflation the highest in almost four decades, real estate remains an attractive investment for many people.
“Real estate is an alternative to the stock market,” said Benjamin Miller, chief executive officer of real estate investment platform Fundrise. “People invest in it for the same reason that they invest in cryptocurrencies. They’re worried about the current economic system and they want options.”
Inflation And Seller Impact
As we have covered a few times before, the real estate market is still heavily favored in the seller’s direction. Home prices rose by close to 20% almost everywhere last year, but house price acceleration has began to decrease. This is not to get confused with home prices, as they are still rising, just less aggressively. Some experts are beginning to predict that home prices will rise by another 15% this year through November. However, this information comes from Zillow, who were made famous for how wrong they were in their iBuying.
The number of homes available for sale has never been lower than it was in December 2021. In our Louisville market, there was less than a month of inventory on the market. This means that in less than a month, real estate inventory would be completely absorbed in a month. With the price of everything going up, the recent rise in cost of the real estate market doesn’t look to bad. People tend to ignore the price increases in the cost of gas and milk when it comes to comparing them to real estate prices.
Housing Is Expensive
As increases in prices ravages the entire U.S. economy, housing supplies is no stranger to these increases. Last year, we saw the price of lumber increase the the highest level ever, before coming back down. Don’t be misconstrued though, as prices came down but were still up over double what they were before the pandemic. Due to the ongoing pandemic and inflation, housing prices could be boosted further this year. With everything involved in building new homes increasing in price, builders have to push the price increases onto homebuyers. This means that as new home builds are still below their 10-year average, the homes themselves cost more than ever.
Not only is housing materials increasing, but so are prices of other consumer products. With more of the homebuyers budget being spent on things like gas, food, and entertainment, they are left with less for their housing budget. This creates problems as it has never been more expensive to rent. Not to mention, owning a home has hidden costs people overlook.
Is Now A Good Time To Buy?
“If it’s not a lifestyle situation where you want more space or want to move to another geographical location, this might be a time to wait it out from buying,” said Liz Young, head of investment strategy at SoFi. “The risk is that the equity in the home doesn’t go up a ton in the next few years because home prices are so high. From an all-time-high price level, there’s downside risk to prices in the near term.”
For those interested in living in aa primary residence for five years, buying now makes tons of sense. However, those who are thinking about buying and moving in 2 years like the early pandemic, you will be mistaken. It is probably smarter to wait to sell as you will be able to actually gain equity in your home, and make money after closing costs and commissions.
Mortgage rates are slowly creeping up throughout the first month of 2022. However, even at the 3.56% rate of today, they are still below historic averages. The average loan rate from a year ago seems like a steal, as they were 2.65%. However, with lower rates, it is still an advantage for buyers. There are plenty of reasons not to be scared by 3% mortgage rates.
“The best time may have passed but certainly rates are still very low relative to inflation,” said Aneta Markowska, chief financial economist at Jefferies. “Anybody who refinances now is going to lock in a still incredibly attractive rate.”