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24
Real estate historically helps hedge against rising inflation
The cost of practically everything is increasing. You've likely noticed it when checking out at the grocery store and filling up at the gas station. The same is true for real estate. It's one of the few cost increases homeowners are happy to see. The average home sales price in Mobile County increased $21,000 from January to December 2021, and in Baldwin County, that increase was even greater at $62,000 over the course of last year, according to the Alabama Center for Real Estate.
What do increasing home prices mean for buyers, though? Even with prices going up, low interest rates have kept home buyers in a decent position to purchase. You must consider many factors before deciding to purchase a home, like your financial situation, your needs and how long you plan to stay in the same home. However, one consideration that is often overlooked, even with the threat of price increases looming, is how owning real estate has historically helped hedge against inflation.
Why? In short, while the cost of goods and services increases, the interest rate you locked in for your mortgage won't, so you're effectively having to pay less for your home each year – an asset likely to appreciate in value over time – than others who rented or purchased a home after mortgage rates increased. Because you can save money with a lower interest rate and likely make money off your home's appreciation, real estate has historically been a sound invest in an economy where inflation is on the rise.
The Consumer Price Index from December 2020 to December 2021, a measure of the average change over time in the prices for consumer goods including food, shelter and transportation, increased 7 percent for all items, the largest 12-month increase since the period ending June 1982. Interest rates are also scheduled to begin rising after the historic lows seen in the previous two years. The Federal Reserve anticipates three interest rate hikes in 2022.
While it's important to maintain perspective – the 1980s and early 1990s saw higher mortgage interest rates and inflation rates than we are currently experiencing – prices are likely not decreasing soon. What does this mean if you're thinking about buying or selling your home in the near future? 2022 is likely the year for you to make your move, especially if you plan on staying in your next home for more than five years.
Locking in lower mortgage rates now will allow buyers to get more house for their money, while sellers can benefit from the increase in home prices. For example, if someone purchased a home in December 2019 for $400,000, assuming a 20% down payment and 30-year 3.72% fixed-rate mortgage, they could now purchase a $430,000 home for the same monthly price, assuming the same down payment, loan terms and a 3.1% fixed- rate mortgage, the average rate in December 2021. Buyers can now afford more home for their money, and sellers benefit from an increase in people wanting to move while rates are still relatively low.
The key to making a successful move is having a trusted real estate advisor providing you the information you need to make informed decisions about your real estate goals. Please contact me so we can discuss your options for 2022.
