Can Buying a Home Offset Inflation?

As the Economy Gets More Complicated…

person holding money

We’re not going to hide the ball — the short answer is yes. Buying a home is a very good way to build a store of potentially lifetime value and stay a step ahead of inflation.

Inflation refers to the way a dollar buys less as time goes on. Home prices outpace the purchasing power of dollars. Rental prices, too, suck up more and more money. And now, we’re seeing inflation in the interest charges on mortgage loans.

But a home’s property value can offset those higher costs. Here’s how the offset works. With interest rates still relatively low (around 5% is still low!), a buyer can get a mortgage and cancel out the interest paid as the home value rises. In that sense, home buyers put inflation on their side.

And that’s why buying a piece of property is called a hedge against inflation. As inflation keeps rising, and mortgage rates follow that upward climb, buyers who get a set mortgage rate today can both (a) avoid paying higher rates tomorrow, plus (b) avoid rent payments, which (in most cases) are regularly adjusted upward for inflation. And that’s not all. The owner gets to claim mortgage interest deductions on federal taxes, too.

Property Values Keep Going Up, Enriching Owners

Earlier generations have not had to cope with the situation buyers face today. In 1980 the owner of a typical house paid under 50K for it. Dollars, obviously, used to be a lot more valuable. In the past decade, the typical house has actually increased 90%, says Zillow.

Real estate costs have shot up while people’s wages have lagged. Retail workers, teachers, healthcare employees and many other indispensable workers are only able to buy if they live far from where they work, or find housemates.

A tenancy in common is a way for co-owners to share a home’s title. Tenants in common can be a pair of owners or a group, related to each other or friends.

And the costlier real estate becomes, the fewer people can afford to buy at all. Most people rent — not by choice, but because they’re unable to buy their homes.

“Starter homes” used to be a thing. Now, where are they? Builders point out that it’s just too expensive to make accessibly priced homes when land, materials, and wages are as high as they’ve become.

“Multi-Family”: Property and Profit

Person looking at paperwork

No doubt: houses are desirable investments for those who can get them. Indeed, large real estate investment companies develop land or buy existing buildings so the rent payers will cover the high cost of building by making their (regularly increased) rent payments.

In other words, the owners of multi-unit rental properties are shifting the inflation burden onto renters, in the form of higher monthly rent.

And why are there so many renters willing to pay these costs? Because they don’t see another path forward. Those unable to qualify for a mortgage are left paying rent that’s going up faster than inflation. They miss the benefit of property appreciation — and that’s a lot at the moment.

Prices are rising so fast in Washington State, for example, that a Seattle homeowner’s wealth may have increased by more than 100K last year, easily — and that’s a lot more than a typical worker earns.   

Throughout 2022, property values are expected to keep going up, but not at the frenzied pace they rose in 2020 and 2021. By late 2023, economists say, we might be looking at the start of a mild recession. Fannie Mae, noting the surge in inflation and the predicted economic downturn ahead, believes that more people will hesitate to buy.

The factors are in place for a rise in corporate buyers to swoop in and purchase homes they can turn into multi-unit rental properties. Some real estate companies that might have stuck with building in earlier times are now scouting for buildings to rent out. These real estate assets in growing towns and cities are expected to pull in rental income, keeping their portfolios ahead of inflation.

Consider Lennar Homes. It’s one of the big U.S. real estate developers, and now it’s also a big landlord. In 2021, the company bought $4 billion worth of real estate to rent out in rising real estate markets.  

William Rahm, a managing director at Centerbridge, which partnered with Lennar, explained: “As the housing needs and demographics in the United States continue to evolve, we believe that the single-family rental sector will continue to outperform.” 

In plain language, more people are expected to stay in the rental cycle, and for longer times.

Large companies with hefty balance sheets can afford to pay for the rising cost of renovating buildings. Those rising costs include higher wages for workers, and more money for scarce resources needed to build and repair homes. They are also well positioned to pay for financing their properties, for the reason we’ve mentioned above: the renter will cover the mortgage loan costs.

Corporate buyers’ ability to cover massive costs in a time of supply chain delays and inflation keeps markets moving, and it also contributes to the cycle of rising property prices. This is the fact of the matter — even where large companies make some rent-to-own units available.

Takeaways for Buyers in a Time of Inflation

Right now, owners nearly everywhere have seen their homes appreciate. If they’ve made it through Covid (so far) without insurmountable financial emergencies, they are in the fortunate position of having valuable real estate and not having to buy during a time when homes are exceptionally pricey. Homeownership right now is an ongoing hedge against unusually rapid inflation.

Potential buyers are taking note. With everyone now facing rising inflation, a real estate buyer will be able to depend on a set mortgage payment and avoid paying inflated rent costs. The key is to buy while financing is still available at a decent price.

Buying into a homeowner’s association can mean dealing with rising HOA fees — but that challenge is generally modest compared to the size of rent payments.

Renting by choice because you plan to move soon? It’s a perfectly reasonable decision. Another option in this case is the adjustable-rate mortgage.

With the market headed for a gentle slowdown, there’s no guarantee a newly bought home will appreciate quickly. We’re unlikely to see the kind of property value surge we saw in 2020-2021 any time soon, if ever. Most of the time, building equity is like watching paint dry. It’s an investment decision that takes patience.

But ultimately, buying a home tends to offer financial safety. Offsetting inflation is just one way it helps.

Supporting References

Patrick Sisson for Why Buying a House Today Is So Much Harder Than in 1950 (Apr. 10, 2018).

Jeff Rohde for What Happens to Real Estate During Periods of Inflation? (updated Feb. 15, 2022).

Natalie Campisi for Forbes Advisor: How Buying a House Can Hedge Against Inflation (updated Sep. 27, 2021).

Lennar Corporation via PRNewswireLennar Announces $4 Billion Single Family Rental Platform with Centerbridge Partners as Lead Investor (Mar. 17, 2021).  

Photo credits: Karolina Grabowska, Tima Miroshnichenko via Pexels.