NWAOR: Using real estate to protect against inflation
As inflation soars, everyone is paying more for everyday goods and services. Inflation hit a four-decade high of 9.1% in June followed by an only slightly better rate of 8.5% in July.
Renters, in particular, are feeling the strain of the rising prices.
The rent on a Salt Lake City two-bedroom apartment increased nearly 17% in the past year to a median of $1,590 per month, according to a July report from rental site Zumper. Meanwhile, the company’s National Rent Index reached a new record high.
Another study from Freddie Mac found that 60% of renters had their rent increase last year. Nearly 1 in 3 renters saw their rent go up by more than 10%.
But what if you could take one of your largest expenses — housing — and make the payment constant over time, even during periods of high inflation?
That’s where the purchase of real estate can help. Here’s how real estate is a hedge against inflation for both homeowners and investors.
Real estate as an inflation hedge for homeowners
Housing is one of people’s largest expenses, with shelter costs making up 32% of spending, according to a blog post from the National Association of Realtors.
With such a large portion of budgets dedicated to housing costs, homeownership helps keep one of your biggest expenses under control. Here’s how it works:
When you purchase a home with a fixed-rate mortgage, your payment remains fixed over time. Even if home prices and interest rates increase, your combined payment for principal and interest remains the same.
While the cost of property taxes and homeowners’ insurance will likely go up, and there will be home maintenance and repairs, a homeowner with a fixed-rate mortgage is unlikely to have housing costs increase 17% in a year. Conversely, renters may be subject to annual price increases.
In other words, your mortgage payment stays constant even while prices on other items increase in an inflationary environment.
Not only that, but you also benefit from home price increases. While many items we buy depreciate and lose value over time, homes do the opposite and generally gain value over time.
In fact, over the long run, home prices tend to grow in value at just more than the rate of inflation. Since 1991, home prices in Utah have increased nearly 600%, according to the Federal Housing Finance Agency.
If you decide to move, these gains and the equity you’ve built up over time will make it much easier for you to buy another home, even if home prices have increased since your last purchase.
Real estate as an inflation hedge for investors
Real estate can act as a hedge against inflation because rental prices tend to rise with inflation. In fact, the increases in rent may even outpace the rate of inflation.
The investor benefits from a fixed-rate loan with constant payments, even while bringing in more income each year because of rising rents, allowing profit margins to grow over time.
Having a stream of income that grows with inflation is particularly important for retired individuals who lose purchasing power in their retirement accounts as inflation rises.
There are many ways to invest in real estate, including options for purchasing real estate through a self-directed IRA. Some people manage rentals on their own; others use the expertise of a property manager. For those who want a less hands-on approach, some financial planners recommend investing in Real Estate Investment Trusts (REITs).
To learn more about the benefits of buying a home in today’s inflationary environment, talk to a local Northern Wasatch Realtor. Find one who specializes in your area by searching the online directory at NWAOR.com.
Stephanie Taylor is the 2022 president of the Northern Wasatch Association of Realtors.