Don’t Let High Inflation Discourage You

Does high inflation discourage you from buying a home?

High Inflation devalues the purchasing power of money, and the interest earned on savings is almost always less than inflation.  Tangible assets like your home consistently become more valuable over time.  In inflationary periods, a home is a good investment and a hedge against high inflation.

Borrowing money at fixed rates during times of inflation can be very advantageous…like buying a home.  The rate stays the same over the mortgage term, and so does the principal and interest payment, instead of going up at the inflation rate.

In September 2022, rents rose by 7.2%, according to NAR Chief Economist Lawrence Yun, and “rents are accelerating to higher figures with each passing month.”  The annualized rate for this year is 10.6%.  Buying a home allows you to avoid rent increases while enjoying property appreciation.

The housing shortage that is fueling the price appreciation, as well as rent increases, has existed for over ten years. Yet, American home building has not kept pace with population growth.

When repaying the mortgage, you are using dollars worth less and less due to high inflation.  Home Price Appreciation has been close to or beaten inflation in the past five decades.

Decade

Home Prices

Average Annual Increase

Consumer Prices

Average Annual Increase

1970’s

9.9%, 7.2%

1980’s

5.5%, 5.6%

1990’s

4.1%, 3.0%

2000’s

2.3%, 2.6%

2010’s

4.9%, 1.8%

20020-21

12%, 3%

2022

13.4%*, 8.2%

*Revised predictions for 2022 home price appreciation are: Fannie Mae estimating 16%; Freddie Mac 12.8%; NAR 11.5%.  The average of the three projections is 13.4%

The funds for the down payment and closing costs sitting idle in a bank while an otherwise qualified buyer waits to see what happens in the market are having their value eroded by inflation.  At the current inflation rate, $48,000 would be worth $39,073 in three years.  In seven years, it would be worth $29,697.

A 90% mortgage at 6.3% for 30 years on a $400,000 home that appreciates at 4% a year will have an estimated equity of $202,000 in seven years due to appreciation and amortization.  That is a 22.8% annual rate of return on the down payment plus $8,000 closing costs.  That is a significant hedge against current inflation of 7.1%. It’s another good reason not to let high inflation discourage you from buying a home.

The borrowed funds in the mortgage produce leverage for the homeowner to enjoy the benefits as the home’s value goes up while the unpaid balance goes down with each payment made due to amortization.

Every day, a renter, who is otherwise qualified to purchase a home, is faced with a decision to continue renting or buy a home.  Don’t let high inflation discourage you from buying a home because renters will ultimately face an increase in their rent. You will feel the erosion of your purchasing power and available funds. Unfortunately, this experience will cost you by not benefitting from the appreciation and amortization benefits of buying a home.

Don’t let high inflation discourage you from buying a home.

Let’s have a great conversation about what opportunities are available now and options that could benefit you, even considering the volatile economic atmosphere we’re all facing. Don’t let high inflation discourage you there are options that may be a great fit for you and your specific needs.

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