Discussions of favorable demographics and challenging inventory shortages have seemingly been replaced with hopeful banter about real estate’s reputation as an inflation hedge.
Too many people forget the ugly economy of the mid-1990s. Real home prices fell at a 6.2% annual rate — 2.5% annual losses compounded by 3.7% inflation rates. Mortgages decreased to 7.8%.A rebound with 5.8% real home-price appreciation a year. Prices rose 8.8% vs. 3% inflation rates. Mortgages decreased to 7%.— prices were up 18.7% vs. 3.2% inflation. Mortgages dipped to 6.4%.The bubble burst into the Great Recession. Price losses of 7.9% a year plus 2.9% inflation rates added up to 10.
That track record isn’t any guarantee. Yet it offers some comfort to folks betting on real estate’s inflation-protection powers after they possibly overpaid in housing’s recent buying binge. Look, inflation is typically the byproduct of an overheated economy. Hot business cycles usually generate plenty of jobs and fat paychecks. Those opportunities help make lofty mortgages payments.
But, remember, inflation also has a bad habit of pushing up mortgage rates. The 30-year average rate is already almost double its January 2021 bottom of 2.65%. And consider last year’s 4.7% average increase in the cost of living topped 3% mortgage rates. Inflation last topped financing costs in 1979.
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