Everyone knows there are many reasons to buy a home, including: (1) enjoying the pride of ownership; (2) locking in a low interest rate; (3) fixing your housing payment; (4) taking advantage of tax savings; and (5) building equity, among other things.
But, most people do not appreciate how important real estate can be as an inflation hedge. I have blogged about this many times, but it is more important than ever I think now b/c significant inflation seems all but inevitable at some point.
Inflation is inevitable.
Our federal and state government debts and unfunded liabilities are growing much faster than our economy is. B/c most of our gov’t expenditures consist of entitlements and/or employee pensions, it is political suicide for politicians from either side of the isle to even think about reducing them.
We have seen this play out over the last ten years with both parties in power and neither doing anything to address the problem. It is also very unlikely that taxes could ever be increased enough to cover our debt burdens simply b/c they are so large.
We currently owe $22 trillion at the federal level with another $200 trillion of unfunded federal liabilities (according to Forbes). Given that our GDP is only $20 trillion and given our political realities, it simply seems very unlikely that we will ever solve our debt problem.
So what will happen when our debts and liabilities get too large to service with tax revenues?
The Fed will print money and “monetize” the debt.
This will foster significant inflation of course, but it seems all but inevitable at this point. (I might add that I am no expert here and I welcome dissent.)
In any case, if/when the Fed does start to monetize our debt, owning a house is one of the best inflation hedges a person can have.
This is b/c a house is a hard asset and hard assets typically appreciate with inflation.
In oversimplified terms, it might work like this: if the Fed doubles the money supply, the value of a house in dollar terms could double too. While at the same time the cost of rent will also likely double. But, the homeowner with a fixed-rate loan will see his or her monthly payment remain the same no matter what happens on the inflation front. This is in fact what happened during the inflation-ravaged 1970s when many homeowners were able to pay off their loans completely with much less valuable dollars.
Anyway, there is one more great reason to buy a home now – to hedge against significant inflation that seems all but inevitable.
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