Inflation, Housing & Mortgages
With inflation here and only expected to get worse, many potential buyers are getting nervous and wondering what to do.
As a result, I thought I’d address a few major considerations today.
1. Housing Is An Inflation Hedge/Protection Against Inflation
As a hard asset, housing tends to appreciate with inflation like we saw in the 1970s and like we are seeing now.
As I explain in this blog (#1 Reason We’re Not In A Housing Bubble), the price of homes tends to increase in proportion to the supply of money in the economy.
And, if the money supply does increase too quickly, the value of our dollars decreases while housing tends to hold its own, thus protecting homeowners from inflation.
2. Mortgages Are Assets In Inflationary Environments
As I explain in this blog (Inflation Makes Mortgages An Asset), borrowers with low fixed-rate mortgages benefit tremendously in inflationary environments.
This is because rents and wages tend to increase in inflationary environments while the value of the dollar falls and fixed-rate mortgage payments remain the same.
As a result, inflation can be a huge boon for debtors, as they get to pay off their debt with much less valuable dollars.
We saw this in the 1970s when borrowers saw their incomes increase sharply over the decade because of inflation, allowing them to easily pay off their low-rate mortgages from the 1960s.
3. Inflation/Fed Policy Will Only Further Increase Housing Prices
As I mention in this 2020 blog (We Have Asset Inflation Now), we have and have had significant asset inflation for some time, as a result of Fed Policy.
This is a point Raoul Pal of Real Vision makes often, and it is what I reference in the above linked blog (#1 Reason We’re Not In A Housing Bubble); when the money supply increases, asset holders (homeowners and stock market investors in particular) benefit the most because money supply increases often result in asset appreciation more than consumer price inflation.
So, buyers who are waiting for prices to fall before buying might be disappointed, as current Fed policy and inflation concerns indicate that home prices will continue to rise.
And this of course is not even taking into account the demographic trends and the low housing supplies that I discussed in this blog last year: Home Values – This Ain’t 2008! WHY? Inventory and Demographics
4. Inflation Pushes Up Rates
One more reminder for buyers who might be sitting on the fence – inflation pushes up interest rates. This is because investors are not willing to hold mortgages or Treasury bonds if the yields are lower than the rate of inflation, as they would be losing money if that was the case.
Hence, interest rates almost always tend to increase with inflation. So, once again, buyers who are waiting for lower home prices might be sorely disappointed if they end up with a 3% higher interest rate than what they could get now.
