If you’re following along with the news today, you’ve likely heard about rising inflation. You’re also likely feeling the impact in your day-to-day life as prices go up for gas, groceries, and more. These rising consumer costs can put a pinch on your wallet and make you re-evaluate any big purchases you have planned to ensure they’re still worthwhile.
If you’ve been thinking about purchasing a Boston condo this year, you’re probably wondering if you should continue down that path or if it makes more sense to wait. While the answer depends on your situation, here’s how homeownership can help you combat the rising costs that come with inflation.
Investopedia explains that during a period of high inflation, prices rise across the board. That’s true for things like food, entertainment, and other goods and services, even housing. Both apartment rental prices and home prices are on the rise. So, as a buyer, how can you protect yourself from increasing costs? The answer lies in homeownership.
Buying a home allows you to stabilize what’s typically your biggest monthly expense: your housing cost. If you get a fixed-rate mortgage on your home, you lock in your monthly payment for the duration of your loan, often 15 to 30 years. James Royal, Senior Wealth Management Reporter at Bankrate, says:
“A fixed-rate mortgage allows you to maintain the biggest portion of housing expenses at the same payment. Sure, property taxes will rise and other expenses may creep up, but your monthly housing payment remains the same.”
So even if other prices rise, your housing payment will be a reliable amount that can help keep your budget in check. If you rent, you don’t have that same benefit, and you won’t be protected from rising housing costs.
While it’s true rising mortgage rates and home prices mean buying a house today costs more than it did a year ago, you still have an opportunity to set yourself up for a long-term win. Buying now lets you lock in at today’s rates and prices before both climb higher.
In inflationary times, it’s especially important to invest your money in an asset that traditionally holds or grows in value. The graph below shows how home price appreciation outperformed inflation in most decades going all the way back to the seventies – making homeownership a historically strong hedge against inflation (see graph below):
So, what does that mean for you? Today, experts say home prices will only go up from here thanks to the ongoing imbalance in supply and demand. Once you buy a house, any home price appreciation that does occur will be good for your equity and your net worth. And since homes are typically assets that grow in value (even in inflationary times), you have peace of mind that history shows your investment is a strong one.
If you’re ready to buy a home, it may make sense to move forward with your plans despite rising inflation. If you want expert advice on your specific situation and how to time your purchase, let’s connect.
How does inflation impact the Boston condo market?
We all know inflation is on the rise… but is that actually a good thing for the Boston condo owners? Join Ken McElroy and Get Rich Education host, Keith Weinhold, in a discussion about how high inflation has *actually* gotten, and how YOU can take advantage of it right now.
Boston condo ownership is affected by many factors with appreciation, inflation, and mortgage rates being the biggest affordability drivers. By studying key home price metrics like the Case-Shiller House Price Index and making inflation adjustments using the consumer price index, the Real Cost of home affordability is not much different today than it was shortly before the Great Recession (2006 – 2007). The Great Recession resulted from rapid house price increases (until the bottom fell out for speculators). In fact, when today’s low mortgage rates are included in calculating mortgage affordability, today’s home affordability costs are about the same as in 2004.
When calculating home affordability over time, I think it’s wise to exclude the Great Recession from most calculations. Real estate speculation caused the Great Recession when overinflated house prices drove mortgage costs to unreasonable and unsustainable highs (mostly with exotic mortgages). The result of the Great Recession was tons of foreclosures that drove prices back down until 2012. Since about 2012, prices have been increasing on a mostly normal trajectory. When this recession is excluded, but appreciation, inflation, and mortgage rates are included, homeownership affordability has surprisingly not changed much over the past 15 or 18 years.
Let’s start with the ‘cash price’ for houses. Without going into the mathematics, if you adjust for inflation and appreciation, an all-cash purchase is about 58% higher today than in 2013. This is ‘all cash’, so you don’t factor in the difference for mortgage rates. That 58% sounds like a really scary number but if you do not adjust for inflation, the change in straight dollars jumps to about 112%. The 112% represents appreciation without making any adjustments. That is a huge increase and what you see when you only look at home value appreciation.
Inflation and mortgage rates are about the ‘time value of money.’ Based on inflation, one dollar today is worth more than one dollar in the future. That’s how mortgages (installment payments) make a high-cost home purchase more affordable. Generally, when inflation is high, mortgage rates are also high to recover the value of tomorrow’s dollar that is loaned today. We’ve been very fortunate that inflation has remained relatively low since 2012 and today’s mortgage rates are at historic lows. It’s the combination of low inflation and low-interest rates that makes homes somewhat affordable today (this combination is an economic rarity). Especially when you consider how much home prices have appreciated in value. When appreciation, inflation, and current low mortgage rates are all accounted for, the affordability of a home today is about 18% higher than in 2013. But remember, home prices had dropped following the Great Recession. By excluding the price drop caused by the Great Recession, today’s affordability is about 2% better than it was in 1990 or the same as in 2004.
It can be difficult to calculate and understand but even when paying mortgage interest, it can be less expensive to afford a house today with a mortgage than to pay ‘all cash’ today. When mortgage rates fall, monthly mortgage payments fall even if the cash price doesn’t. The high appreciated values and time value of money is why a cash purchase today is 58% more expensive than in 2013. However, by combining today’s low-interest rates with the time value of money, home affordability is actually 4% better than in 2019. There couldn’t be a stronger case for taking out a 30 year fixed rate mortgage.
Of course, there are other factors involved also, and those are big problems for today’s first-time home buyers. Bruce, first-time homeownership is the American Dream but it has never been easy. Today’s biggest challenges for millennials are student debt and high credit card debt that resulted from instant gratification purchases during their younger years. The time value of money works both ways. If all of that debt had been invested in a compounding account, what seems like extraordinarily high down payments now would have already been in the bank by age 30 or 35.
Boston Real Estate and the Bottom Line
I know this is a lot of mathematics and economics but I hope that it helps you the Boston real estate blog reader better understand how inflation and home value appreciation work together (along with mortgage rates). And I hope you achieve the American Dream of homeownership.