Real Estate : A Good Hedge Against Inflation?
April 27, 2009It’s something we’ve often pondered. If you have a fixed mortgage payment over 30 years, that payment becomes more and more like child’s play as the years progress and inflation rises. What once seemed like a fortune when you first purchased your home is diminished over time with rising salaries, consumer prices, and paying back your loan with less valuable dollars than you initially borrowed.
Inflation Rates of Nations Around the World (click to enlarge)
It’s an interesting theory, and we read an article that talks about inflation-hedging investments. You can click HERE to view the article, which was published by USA Today (John Waggoner). If you don’t have time, here is a snippet from the part that discusses real estate:
If you own a home, you probably have plenty of real estate. Despite the dismal state of the real estate market, however, your home can be a significant inflation hedge in the future.
Home prices — absent a bubble — mirror the consumer price index fairly faithfully. And if you have a low-rate, 30-year, fixed mortgage, your note will become a thing of beauty as prices rise. Your home value will rise, your salary will rise, but your mortgage payment won’t. In addition, you’ll repay the loan with cheaper dollars.
The catch: Interest rates tend to rise at the end of an inflationary period, squeezing new home buyers out of the market — and forcing prices down.
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