With inflation recently hitting a 40-year high, the health of our economy is on everyone’s mind. A surge back to “normalcy” (after a lockdown which hamstrung consumer spending), coupled with large federal stimulus plans, has supercharged demand for goods and services along with the prices attached to them. Making matters worse, supply chain issues seem to be plaguing virtually every industry, further driving up the costs of many materials and products. So, in the face of such economic uncertainty, is there anything that can be done to protect yourself? As any investor worth their salt will tell you, you have to hedge your bets.
Hedging is a vital part of investing, as it helps minimize losses during major market fluctuations that can occur in reaction to events like inflation (don’t put all your eggs in one basket!). Hedges are assets that are either less volatile, or tend to behave in ways that are distinct from other assets in your portfolio. Among the most popular hedges against inflation are gold, bonds, and yes, you guessed it… real estate.
Real estate is regarded as a hedge against inflation for a number of reasons. First and foremost is the effect inflation has on debt. As home prices rise over time, it lowers the loan-to-value ratio of any mortgage debt, acting as a natural discount. The equity on your property increases, but your fixed mortgage payments remain the same.
Similarly, inflation can benefit real estate investors who are earning income from rental properties. As market rents increase, so does your income, provided your mortgage payments remain the same. With that being said, other costs associated with operating a rental property, such as maintenance and repairs, may be subject to increases during times of inflation.
Finally, real estate is an attractive hedge in general simply for its tendency to stay on a steady upward trajectory over time. Real estate does experience boom and bust cycles, but even after the market crashed in 2008 (perhaps the worst such crash in US history), Bay Area homes had returned to pre-crash prices in just a few years. Over time, there are few assets that are as reliable, with as high of a potential ROI, as real estate.
Of course, the benefits of homeownership extend far beyond its value as a hedge against inflation. Give us a call any time, and we’d be happy to talk your ear off about it.