Worried About Inflation? Buy a House

Kyra West

04/25/22

It's not just the price of gas that's been steadily (and sometimes not-so-steadily) increasing recently. We've seen prices from everything from groceries to houses spur a lot of headline touting inflation fears and talks of housing bubbles. Comparisons abound to the inflation crises of the 1970s and almost everyone looking for ways to hedge against further increases. Mortgage rates have climbed too - from 3.2% last April to 5% now.

But what does that actually mean for your average homeowner or someone looking to buy their first house? Should rising mortgage rates and inflation deter you from buying a home now? In fact, experts seem to agree it's the opposite.

"Buy now." says Wall Street journal columnist Laurence Kotlikoff. "Houses, like most physical assets, retain their real value during high inflation and have done far better than most such assets. Plus, if you buy a primary residence now and home prices fall, you won’t be affected unless you need to sell. As long as you have a stable job, can manage your mortgage, and don’t need to move anytime soon, a short-term drop in housing price."

As always, this advice is dependent on your circumstances - and a trusted local real estate agent and mortgage professional are key to making sure you're buying at the right time (and place!) for you. After all, real estate is always local. Prices climbing in Seattle can be sustained by a continued influx of tech workers, while prices climbing in rural areas (perhaps sustained by city dweller relocating during the pandemic) is more likely to fluctuate.  But really, it comes down to the individual's circumstances and how long they're going to be living in that property. 

Looking to flip it in 2 years? Maybe think again. 

“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 staying in a home for more than five years, buying makes sense, she said. But if you think you might have to sell before then, it might be better to wait."

Doing the Math

Let's go back to those inflation worries though. If everything is getting more expensive, why wouldn't it be a good idea to save your money now and not stretch it to buy a home? Our friend, economist Laurence Kotlikoff, goes into great detail in that Wall Street Journal article,  if you're willing to follow along down the inflation rabbit hole. But let's start with a bite-size piece first:

"A year ago [inflation] was running at 2.6% on a year-over-year basis (March 2020 through March 2021). Today, this retrospective annual inflation measure is 8.5%. We haven’t seen inflation this high since the early 1980s. If inflation continues at this rate, you’re better off borrowing money today at 5% and paying it back a year from now with dollars that have depreciated by 8.5%."

If inflation then becomes a upward trend - which experts seem to agree is the case in the short term - then grabbing that 5% mortgage now, while still high, means your monthly payment amount essentially decreases as the dollars you're paying it with go down in value. Not a happy thought - but those same dollars would be doing even less for you - and still be depreciating - if you didn't buy a house and kept it in savings. Or, if you invested in a stock or bond that appreciated at a rate lower than inflation. 

What Wall Street is Banking On

There's plenty of people from real estate investors to Wall Street doing these same numbers, and looking at which way they're betting can help everyone plan their own moves. Kotlikoff explains how the market is reacting (and betting) on inflation changes: 

"The one-year Treasury bill rate is 1.7%. The one-year inflation-indexed Treasury bill is negative 3.2%. Hence, the market is figuring inflation at 4.9% (1.7% plus 3.2%) over the year. That’s still less than the prevailing 5% nominal mortgage interest rate, meaning that at least in the first year a 30-year mortgage costs nothing after inflation. If the market’s wrong and inflation runs for the next 12 months at last month’s pace, you’ll make a substantial real return on your mortgage.

To be sure, 30 years is a long time. Inflation could quickly drop and stay low for decades. The market forecasts only 2.6% inflation over the next 30 years, according to the difference between the 30-year nominal and inflation-indexed Treasury yields. A 2.4-point spread between the mortgage and inflation rates still makes the former incredibly low. The projected real mortgage rate is still close to its three-decade low, a period that includes many years of inflation far lower than today’s. And the nominal 30-year mortgage rate of 5% is far below the typical value going back half a century."

But what if Wall Street is wrong? It's been known to happen and a 30-year mortgage is a big commitment.  Kotlikoff has an answer for that too - apparently either way, buying a home is not a bad idea:

"The good news is that if inflation drops as predicted, interest rates on fixed-rate mortgages will likely decline as well. This means you should be able to refinance your 5% mortgage at a lower rate and monthly payment. If inflation exceeds expectations, you’ll be ahead of the game."

Key Takeaways

  • Inflation is likely in the short and long terms
  • Even high-priced real estate should retain its value in metro areas
  • Higher mortgage rates are still lower than expected inflation
  • Buy Now - no really, if you're worried about bubbles and inflation, buying a home is still a good idea in the short term, no matter which way the inflation cookie crumbles. 

 

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