A Home Is Your Castle Against Rising Inflation
My title is the exact headline from this recent WSJ column by economist Laurence Kotlikoff.
The first line of his column was this: “Mortgage rates are up to 5%, and some fear a valuation bubble. Even so, it’s a good time to buy.”
I have been beating the “houses-equal-inflation-hedge” dead horse for years now, but I am just a mortgage guy who has a dog in the fight (because more homebuying means more mortgage business).
SO – when an economist, with no dog in the fight, makes the case – it is worth taking notice.
Mr. Kotlikoff is a professor at Boston University, so he is legit and not just some armchair macro guy spewing opinions all over the internet.
Here are some of his key points:
- Mortgage rates have risen 2% over the last year, and we’ve never seen a time when rates rose this quickly without cooling off the market (which shows how strong the market is).
- When mortgage rates are lower than inflation, your mortgage is an asset. So, even if rates are way up to the “staggering level” of 5%+, if inflation is running at 8.5% (official rate) or 15% (“actual rate” many pundits are citing), the ability to pay back your mortgage debt with much less valuable dollars is a huge gift from mortgage lenders. Again – this is how many debtors got rich in the 1970s, and it is how some debtors got filthy rich during Weimar, Germany’s hyper-inflation of the 1920s.
- If inflation recedes, borrowers can comfort themselves with knowing they are still getting rates that are near 3-decade lows!
- If inflation disappears altogether and rates plummet, borrowers can simply refinance (and usually at no cost).
He then finally makes the case that inflation is here to stay because of: continued embargoes against Russia; continued supply chain bottlenecks; Covid shutdowns in China; and massive money printing the world over.
I personally think we will see inflation subside later this year as inventories stack up and the economy weakens (based on comments Jeff Snider made in his Eurodollar University podcast). But long term, I think massive inflation is all but inevitable because of our massive federal debt, and more disconcerting, because of our enormous unfunded Social Security and Medicare liabilities (well over $100 trillion).
Our government will have no choice but to print its way out of the mess it has created, making inflation all but certain at some point.
So… you might want to buy a house.
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