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FG Trade/Getty Images July 20, 2022 Erik J. Martin is a Chicago area-based freelance writer/editor whose articles have been featured in AARP The Magazine, Reader's Digest, The Costco Connection, The Motley Fool and other publications. He often writes on topics related to real estate, business, technology, health care, insurance and entertainment. Suzanne De Vita is the mortgage editor for Bankrate, focusing on mortgage and real estate topics for homebuyers, homeowners, investors and renters. Bankrate logo

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How a home purchase can hedge against inflation

Buying a home can be a hedge against inflation primarily because: As inflation rises, so should the value of your home. The loan-to-value (LTV) ratio of your mortgage will decrease as your home’s value increases over time. In other words, your fixed-rate mortgage payments stay unchanged while your home’s equity rises. If you buy a rental property, you can charge more for rent as inflation pushes prices up. “Home price appreciation has been a nice hedge against inflation, with home prices growing slightly faster than the rate of inflation when measured over an extended period of time,” says Greg McBride, chief financial analyst for Bankrate. “The recent spike in inflation was preceded by a surge in home prices that insulated homeowners in a way that renters were not.” The median sale price for a home rose from $329,000 in the first quarter of 2020 to $428,700 in the first quarter of 2022, according to the Commerce Department — an increase of about 30 percent in two years. “Over the same period, U.S. inflation hit 11.5 percent,” says Al Lord, founder and CEO of Lexerd Capital Management, based in Summit, New Jersey. “This makes the average house price still [approximately] $68,000 higher than in early 2020, even after adjusting for inflation.” If you get a fixed-rate mortgage, that could help safeguard against inflation, as well. That’s because you’ll continue to make the same monthly principal and interest payment while your home’s value climbs over time. Likewise, if you invest in a rental property, you could see higher returns. “While you own the property, if inflation rates continue to rise, so will the value of the home and your rental amount,” says Michael Gevurtz, president and CEO of Bluebird Companies, a real estate lender based in Philadelphia. “This means your profit margins will widen over time. As the prices for all goods and services increase, so can the amount you charge for rent, thereby increasing your return on investment.”

Relationship between inflation and the housing market

There’s a link between that has become especially pronounced in the current economic environment, as both construction costs and demand have increased. “Inflation causes materials required for housing construction to rise and serves as a decelerator of supply of new housing in the market,” says Lord. “When new construction slows down, the value of existing inventory tends to increase. Consequently, increased demand and moderating supply for housing lead to higher home prices, or housing inflation.” Additionally, inflation makes it easier to secure financing to purchase a home, as more money is available to lend. “Because more people can get loans, however, more people are chasing a set amount of houses, which then drives home prices up,” says Joel Ho, founder of InflationTraining.com, which provides education on inflation for companies and individuals.

How does inflation impact mortgage rates

Lightbulb Bankrate Insight To cool elevated inflation, the Federal Reserve raises its federal funds rate, which in turn affects the borrowing cost of financial products, including some mortgages. Generally, in times of higher inflation, rise, too. “The soaring mortgage rates of 2022 can be tied to inflation hitting four-decade highs and the Federal Reserve needing to aggressively raise interest rates in hopes of corralling inflation,” says McBride, adding that “while homeowners have had some insulation from inflation, homebuyers have not. Rising home prices and soaring mortgage rates have further undercut affordability for many would-be homebuyers.” The Federal Reserve has already raised rates three times in 2022 and intends to do so again at the end of July. This has an indirect , as well as on adjustable mortgages and home equity products.

Where inflation is headed

No one owns a crystal ball, but for now, many foresee higher-than-normal inflation rates. “It is not yet evident whether inflation has peaked or not,” says McBride. “What began on the supply side, first with pandemic-related supply chain issues and then a war in Ukraine, was also stoked by an environment of low interest rates and stimulative monetary policy. The price for reining in inflation may well be a recession, and it will take another year or two to get inflation back down to the Federal Reserve’s 2 percent goal.” “There are signs that inflation will moderate at the level of 5 percent or 5.5 percent by the end of 2023, but this depends on the ability of the Federal Reserve to speed up increases in interest rates,” says Lord. “Over the next quarter or two, we will likely see a temporary slowdown as Fed rate hikes hit,” says Ho. “However, because the federal budget constrains the amount of hiking the Fed can do, inflation will pick back up.”

Inflation FAQ

What is inflation

Inflation is a rise in the prices of goods and services over a sustained period, either due to an increase in the supply of money circulating in the economy or an increase in prices due to higher production costs. Ultimately, inflation decreases consumers’ purchasing power, meaning the dollars in your wallet won’t go as far.

What causes inflation

Inflation is typically caused by an increase in the cost of manufacturing or production, an increase in money supply or both. It can also be brought on by economic disruptions, such as the recent pandemic-related supply shortages.

How does the Federal Reserve influence inflation

The Federal Reserve has the power to affect inflation. It often increases interest rates when inflation is higher than desired to decelerate the economy. The Fed can also decrease rates to boost the economy when inflation is considered too low.

How do you calculate inflation

Inflation is often measured via these indexes: the U.S. Department of Labor’s Consumer Price Index (CPI); the Labor Department’s Producer Price Index (PPI); and the Commerce Department’s Personal Consumption Expenditures (PCE) price index.

Bottom line

Despite inflationary pain, now might still be a good time to buy a home provided you can afford the mortgage, have a stable source of income and don’t expect to move for the next several years. This’ll give the property enough time to appreciate, even with the potential for recessionary bumps in the near term. “If you plan on owning the property for at least the next five to 10 years, the value of the property will likely increase,” says Gevurtz.
SHARE: Erik J. Martin is a Chicago area-based freelance writer/editor whose articles have been featured in AARP The Magazine, Reader's Digest, The Costco Connection, The Motley Fool and other publications. He often writes on topics related to real estate, business, technology, health care, insurance and entertainment. Suzanne De Vita is the mortgage editor for Bankrate, focusing on mortgage and real estate topics for homebuyers, homeowners, investors and renters.

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