Explaining inflation and how real estate is a good hedge against it.
Inflation: what is it, and how can real estate hedge against it? I am no financial expert, but I have been doing some research recently, so I wanted to share what I know.
Inflation is a currency’s loss of value over time. Experts track inflation by watching how the prices fluctuate for a group of goods over a specific period. According to Forbes, the inflation rate at the end of February 2022 was 7.9%. That’s the highest it has been since January 1982 when it was 7.5%.
The only group that hates inflation more than we do is the Federal Reserve. They have two jobs: controlling inflation and maximizing employment. This time around, the Fed was a little slow to realize that our inflation wasn’t just because we were in a transitory period. However, they’ve realized that inflation is a problem over recent months and have taken a monetary policy approach to make sure it doesn’t impact the general economy.
Inflation isn’t going anywhere, though. The rate of inflation in February was driven by gains in the food, gasoline, and shelter industries. This puts more pressure on the average American family.
How does real estate hedge against inflation? As your home price rises, the loan-to-value ratio of your house decreases. Your equity will grow, but your mortgage payments will stay the same. When property prices rise, rents also tend to go up. If you’re collecting more rent, your profit margin might increase because your mortgage will stay the same.
Home prices have also increased steadily over time. Even after the crash of 2007, home values returned to their pre-crash numbers after a decade. In the last two years alone, we’ve seen 33% appreciation. The value of your home will be there in the long run. Even as the value of the dollar goes down, your home will continue to grow in price.
Real estate can be a great place to put your money to hedge against inflation. If you’re interested in learning more, talk to your financial advisor. If you’re thinking about investing in real estate, contact your real estate advisor. Of course, I’m happy to answer any further questions you have. Just give me a call or send me an email. I’d love to hear from you.