Using Homeownership to Hedge Against Inflation

Using Homeownership to Hedge Against InflationWe know that inflation and all its effects are at the front of many of our clients' minds. One of the best strategies to offset the impact of inflation is homeownership. If you're looking for a tool that will provide long term financial security and hedge against inflation, these are some of the reasons homeownership will do just that. 

Fixed Mortgage Payments

One of the most straightforward ways homeownership protects against inflation is through fixed mortgage payments. When you take out a fixed-rate mortgage, the interest rate and monthly principal and interest payments remain constant throughout the life of the loan. This stability contrasts sharply with renting, where lease agreements are typically subject to annual increases that can outpace inflation.

Over time, as prices for all kinds of other things rise, the fixed mortgage payment effectively becomes cheaper in real terms. This provides significant savings and predictability in your budget.

Home Value Appreciation

Real estate tends to appreciate over time, often at a rate that exceeds inflation. While there are market fluctuations, the long-term trend for home values is generally upward. This appreciation means that as the dollar loses value, the market value of your home increases, preserving and even enhancing your equity.

For instance, if the inflation rate is 3% per year but your home appreciates by 5% annually, your investment is growing in real terms, adding to your wealth rather than diminishing it.

Building Equity

In addition to the passive appreciating thanks to market growth, each mortgage payment you make increases your equity in the home, effectively serving as a forced savings mechanism. Over time, as you pay down the principal, your ownership stake in the property grows.

In an inflationary economy, the value of this equity typically increases alongside the market value of the home. This growing equity can be a critical financial resource, providing a buffer against inflation and the option to access funds through home equity loans or lines of credit if needed.

Bill Gassett of Maximum Real Estate Exposure is a home sales expert who I knew would provide valuable information:

"Owning a home is one of the best things you can do, especially during times of high inflation. As most people have witnessed, the cost of everything has skyrocketed over the last several years. This includes homeownership and everything surrounding it.

Imagine for a moment if you purchased a home three years ago. Where would you be now? More than likely sitting pretty with a significant amount of equity. It would have softened the blow of paying so much more for everything else in your life. At least you would know that you would be making some of that money back by owning a home instead of making your landlord rich.

Remember too that there are tax incentives for owning a home so you save even more money over the long term. This is why experts often say that owning a house can be a hedge against inflation."

Leveraged Investment

Homeownership allows for leveraged investment, where you use borrowed funds to purchase a valuable asset. By putting down a fraction of the home’s purchase price as a down payment and borrowing the rest, you can benefit from the full appreciation of the property.

For example, if you buy a home worth $300,000 with a 20% down payment, your initial investment is $60,000. If the home appreciates by 5% in one year, its value increases by $15,000. This gain represents a 25% return on your initial $60,000 investment. Leverage can significantly amplify the financial benefits of property appreciation and give you an edge when inflation is impacting other parts of your finances.

Stabilized Housing Material Costs

Inflation often leads to higher replacement costs for homes due to increased prices for building materials and labor. As these costs rise, the value of existing homes typically increases as well, providing homeowners with protection against the escalating costs associated with new construction. This trend ensures that the investment in an existing home remains valuable even as inflation drives up the costs of replacing it.

Predictable Housing Expenses

Owning a home offers personal financial stability and control that renting cannot match. Homeowners are not subject to the uncertainties of rising rents or the whims of landlords. This stability allows for more predictable financial planning and greater control over living conditions, including the ability to make improvements and modifications that can enhance the property's value. In an inflationary environment, having control over a major expense like housing can be a significant advantage.

If you're wondering whether you should invest in a home with current market conditions, we'd love to talk with you about your unique scenario. Taking advantage of real estate investment as a way to protect yourself against inflation is a strategy that might be your best wealth-building tool. Contact us any time to learn more or begin the search for homes for sale in Columbus.

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