As inflation continues to steadily push up the price of everything from groceries to gas, you may be wondering how you can offset the impact it has on your wallet. Although home prices remain high, interest rates are still relatively low (compared to historical averages), so it could be the ideal time to lock in a mortgage to combat inflation. Because while many goods and services become less affordable over time as inflation lingers, buying a home could be a good hedge against the erosion of purchasing power.
How does inflation affect housing?
In general, the price of real estate rises along with inflation. This surging cost of homes can leave a ton of buyers priced out of the market, causing many to continue renting. In turn, the increased demand also drives up rental prices. So, when both rent and home prices are high, it can be difficult to determine if renting or buying a home makes the most financial sense. Consider how inflation will affect you if you’re buying or selling a home.
How might inflation impact you if you’re looking to sell a house?
Because inflation causes higher home prices, you can expect to list for top dollar if you decide to put your house on the market. When inflation is high, there’s a stronger likelihood you’ll turn a profit on the sale of your home — netting more cash than you likely would under different conditions.
Keep in mind, though, if you sell your home, you will need to find somewhere to move that works for your budget. You’ll have to consider if your profit would be enough to purchase something else. Don’t forget that other home prices will be on the higher end as well, so unless you are looking to downsize or move to a less expensive area, you might not net a profit. The combination of low inventory and high home and rental prices could make it difficult to find your next place to live in the current housing market.
Pro Tip: Use Ally’s home value estimator to determine how much your home may be worth.
Using real estate to hedge against inflation
In general, real estate is considered a good hedge against inflation because it tends to keep pace with other surrounding costs that are on the rise. Understanding the various factors that make a home purchase a reliable hedge against inflation can help you determine if it’s the right move for you and your family.
Low, fixed interest rate
Although home prices are high, interest rates remain relatively low. Entering a fixed-rate mortgage now will ensure your expected monthly payments aren’t impacted by any future interest rate spikes.
Avoid rising rent
Inflation often leads to higher rents as well. By purchasing a home, you can avoid paying more of your monthly budget to your landlord — and you’ll build equity at the same time. If you’re planning on living in the same area for a long time, owning your home means you won’t be subject to annual increases or any other fees that your landlord can impose during lease renewals.
Increased property values
Overall, property values can be relied upon to steadily increase over time. In fact, the median sales price of houses sold in the U.S. has increased over 350% since 1990. This consistent growth makes building equity through homeownership a dependable way to create wealth. And that’s reflected in the median household net worth of homeowners in the U.S. homeowners ($255,000) compared to renters ($6,300).
Note that when purchasing a home you’ll probably have to make a down payment (3 – 20% of purchase price) and pay closing costs (2 – 5% of purchase price), which will cut into your profitability initially, but can be made up over time.
What are other ways to hedge against inflation?
In addition to purchasing real estate, you can take advantage of additional ways to minimize the effects of inflation. Diversifying your portfolio with a variety of securities is one investment strategy that can help mitigate inflation. Investing in companies that can raise their prices to keep up with inflation — like those in the consumer staples sector — can potentially yield you higher returns.
TIPS (Treasury Inflation Protected Securities) are a type of treasury bond specifically designed to help buffer the effects of inflation over time. TIPS’ principal rises and falls in tandem with inflation, so they are considered some of the safest ways to invest against inflation because they’re government-backed bonds.
Precious metals, such as gold, also have a history as a strong hedge against inflation. Gold usually holds or even gains value better than other types of investments during periods of inflation. You can invest in precious metals in a variety of ways, including investing in a metal ETF through self-directed trading.
Homeownership and buying rental properties are not the only ways to invest in real estate. You might also consider investing in a REIT (real estate investment trust), which is a company that owns (and usually operates) a real estate property that generates income. You can also invest in REIT mutual funds and REIT ETFs. Because REITs are traded on an exchange, they’re normally easier to buy and sell than physical property.
Consider buying a home to fight inflation
Inflation can be tough on your wallet, but you can fight back. Investing in real estate is one strong way to hedge against inflation. If you’re in a position to buy, now could be an ideal time to lock in a low mortgage rate and begin building equity.
Ally Home wants to help you inflation-proof your finances.