House as an inflation hedge?

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am
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House as an inflation hedge?

Post by am »

If inflation goes higher than 3% or so, will house values necessarily go up as much? Was this the case during the high inflation 70s/80s? For me, the house I own outright represents about 50% of net worth. The other 50% is in investments and has no inflation indexed assets like TIPS just stocks, bonds, cash. Will my net worth go down if we have greater than expected inflation or will my house protect me?
Call_Me_Op
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Re: House as an inflation hedge?

Post by Call_Me_Op »

am wrote:If inflation goes higher than 3% or so, will house values necessarily go up as much?
No, house values will not "necessarily" keep up with inflation, but based upon the historical performance of real estate, they are likely to do so.
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dbr
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Re: House as an inflation hedge?

Post by dbr »

If the value of your house keeps pace with inflation that will certainly not compensate for the loss of purchasing power of your investments. To get that to happen the value in your house would have to increase at twice the rate of inflation, assuming a 50/50 allocation.

It is common to confuse inflation protected or inflation neutral assets with the completely different concept of an investment that somehow hedges a whole portfolio. A common example is people who have fixed pensions or annuities that therefore need other assets that compensate at a multiple of the rate of inflation to "hedge" the situation as a whole.
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grabiner
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Re: House as an inflation hedge?

Post by grabiner »

While your home value is not an inflation hedge, the fact that you own a home rather than renting creates an inflation hedge for your expenses. If there is inflation, rent will go up, and whatever the house happens to be worth, it will automatically provide you a place to live that is worth just as much as the then-current rent. If you have a fixed-rate mortgage, that cost won't go up either. (If you have an adjustable-rate mortgage, short-term rates normally rise with inflation, so your mortgage cost will go up.)

You don't get a complete hedge, because the maintenance expenses and property taxes will increase with inflation. Likewise, if you have a HOA or condo, the HOA/condo fees will probably track inflation.
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Re: House as an inflation hedge?

Post by Professor Emeritus »

A home you own and live in is an extremely complex asset. As has been pointed out it is a protection against increases in the cost of housing. It is also untaxed "imputed" income equal to its rental value minus tax insurance and maintenance expenses.
For a retiree if that imputed income is more than about 35% of total income you are often considered "over housed"

I dealt with a case of a couple on SS who lived in a million dollar house they owned outright . They could not understand why they were so "poor" since they got a hefty property tax break. But they were still in effect spending 70% of their "income" on housing.
They sold the house and are doing fine
Last edited by Professor Emeritus on Sun Mar 09, 2014 12:11 pm, edited 1 time in total.
dbr
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Re: House as an inflation hedge?

Post by dbr »

I've never been persuaded that mentally accounting compartmentalized assets against compartmentalized liabilities leads to the best overall financial planning, but maybe in some cases it is helpful. Anyway, it is still true that a house is not an inflation hedge in the general sense of the term.
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Cosmo
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Re: House as an inflation hedge?

Post by Cosmo »

Call_Me_Op wrote:
am wrote:If inflation goes higher than 3% or so, will house values necessarily go up as much?
No, house values will not "necessarily" keep up with inflation, but based upon the historical performance of real estate, they are likely to do so.
Agree but having a mortgage on that home is a good inflation hedge though. Imagine having a fixed priced 30 year mortgage at 3% and short and long-term rates are more than double than that (or more). That's what the "pay your mortgage off" crowd here always ignores. They wrongfully assume that interest rates will remain low forever. Well forever (and even a few years) is a long time.
Cosmo
Valuethinker
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Re: House as an inflation hedge?

Post by Valuethinker »

am wrote:If inflation goes higher than 3% or so, will house values necessarily go up as much? Was this the case during the high inflation 70s/80s? For me, the house I own outright represents about 50% of net worth. The other 50% is in investments and has no inflation indexed assets like TIPS just stocks, bonds, cash. Will my net worth go down if we have greater than expected inflation or will my house protect me?
As per Cosmo:

- a house is not necessarily an inflation hedge. It's too specific an investment. Houses in New York or San Francisco have far beaten inflation. Houses in Buffalo or Detroit have not. I wouldn't count on your house keeping up with inflation

- a long term fixed rate mortgage *is* an inflation hedge

I think people think the former is true, because the latter is true.
tj
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Re: House as an inflation hedge?

Post by tj »

Cosmo wrote:
Call_Me_Op wrote:
am wrote:If inflation goes higher than 3% or so, will house values necessarily go up as much?
No, house values will not "necessarily" keep up with inflation, but based upon the historical performance of real estate, they are likely to do so.
Agree but having a mortgage on that home is a good inflation hedge though. Imagine having a fixed priced 30 year mortgage at 3% and short and long-term rates are more than double than that (or more). That's what the "pay your mortgage off" crowd here always ignores. They wrongfully assume that interest rates will remain low forever. Well forever (and even a few years) is a long time.
Cosmo

I just don't see the banks letting that happen because they'll be holding a ton of very long term low rate notes that people would keep indefinitely
Harold
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Re: House as an inflation hedge?

Post by Harold »

Cosmo wrote:Imagine having a fixed priced 30 year mortgage at 3% and short and long-term rates are more than double than that (or more). That's what the "pay your mortgage off" crowd here always ignores. They wrongfully assume that interest rates will remain low forever. Well forever (and even a few years) is a long time.
Mortgages already include a market assessment of future inflation rates. Financial institutions are pricing the value of those future cash flows at that level of risk -- what you see is the consensus. There are plenty of reasons why inflation could stay low for a long time, and the prices reflect that.

If you want to bet that the market is incorrectly assessing future inflation, you are free to do so. A mortgage is a good way of hedging against higher than expected inflation. It comes at a cost though -- if inflation is in line with (or below) expectations you'll have lost your bet, and the money you spent.

From an efficient market pricing perspective, an investor generally accepts the assessment of the market without having to assume anything. If an investor doesn't accept current pricing, he is free to make assumptions and act on them by making speculative choices.

Paying the mortgage off is a completely rational decision -- as is being willing to bet against the market and pay to hedge against inflation increases. Totally up to each individual.

(Incidentally, as the present value of future rents, housing prices also include an assessment of future rent increases -- so it's somewhat counter to an inflation hedge in that you've already locked in all those future rent estimates.)
edge
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Re: House as an inflation hedge?

Post by edge »

tj wrote:
Cosmo wrote:
Call_Me_Op wrote:
am wrote:If inflation goes higher than 3% or so, will house values necessarily go up as much?
No, house values will not "necessarily" keep up with inflation, but based upon the historical performance of real estate, they are likely to do so.
Agree but having a mortgage on that home is a good inflation hedge though. Imagine having a fixed priced 30 year mortgage at 3% and short and long-term rates are more than double than that (or more). That's what the "pay your mortgage off" crowd here always ignores. They wrongfully assume that interest rates will remain low forever. Well forever (and even a few years) is a long time.
Cosmo

I just don't see the banks letting that happen because they'll be holding a ton of very long term low rate notes that people would keep indefinitely

First, almost all mortgages are sold to Freddie/Fannie. Second, the average life of a mortgage is pretty short due to moving/refinancing/etc.
Topic Author
am
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Re: House as an inflation hedge?

Post by am »

Cosmo wrote:
Call_Me_Op wrote:
am wrote:If inflation goes higher than 3% or so, will house values necessarily go up as much?
No, house values will not "necessarily" keep up with inflation, but based upon the historical performance of real estate, they are likely to do so.
Agree but having a mortgage on that home is a good inflation hedge though. Imagine having a fixed priced 30 year mortgage at 3% and short and long-term rates are more than double than that (or more). That's what the "pay your mortgage off" crowd here always ignores. They wrongfully assume that interest rates will remain low forever. Well forever (and even a few years) is a long time.
Cosmo

My mortgage was a large amount like 350k. Since I was early in the pay off, every year I would pay more than 10k or so in interest. Regardless of future interest rates, hedges etc. the prospect of ridding myself of 10k in interest payments was extremely appealing. Not to mention that my assets in taxable account at the beginning of 2013 exceeded my mortgage amount. I felt that this opportunity to pay off the mortgage may not present itself again so I paid it off. Do not regret paying off house one bit, but do regret not waiting longer, but cant time the market. Market could have fallen and would have kicked myself much more. A mortgage is a debt and will cost a ton if you wait to pay it off the entire term. Perhaps the alternatives will be better like investing, but this is not guaranteed, while ridding yourself of thrown out interest money is a sure bet.
cherijoh
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Re: House as an inflation hedge?

Post by cherijoh »

Cosmo wrote:
Call_Me_Op wrote:
am wrote:If inflation goes higher than 3% or so, will house values necessarily go up as much?
No, house values will not "necessarily" keep up with inflation, but based upon the historical performance of real estate, they are likely to do so.
Agree but having a mortgage on that home is a good inflation hedge though. Imagine having a fixed priced 30 year mortgage at 3% and short and long-term rates are more than double than that (or more). That's what the "pay your mortgage off" crowd here always ignores. They wrongfully assume that interest rates will remain low forever. Well forever (and even a few years) is a long time.
Cosmo
Yes, anyone who had a low interest fixed rate mortgage in the 60's and was in the same house in the 70's figured that out quickly. My parents bought a house in '62 with a fixed rate VA loan at 4 3/4%. Interest rates shot through the roof and you could get double digit rates on FDIC insured CDs and savings accounts. The bank kept trying to incent my parents to pay it off early - I think they even offered a principle reduction.
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