The U.S. inflation rate was 8.2% in September. This is a slight drop from the 8.3% rate in August but more than the 8.1% economists were forecasting for the month.
At the same time, the average median house price declined to $389,500 in August, compared to a high of $413,800 in June. But the median house price is still higher than a year ago.
Over the years, real estate has been promoted as a hedge against inflation. But how can that be true when housing prices are declining? Is real estate really an inflation hedge?
What Is Causing Current Inflation?
Inflation is a rise in prices that causes a decline in the purchasing power of the dollar. For example, an item in a store that cost $5 last year may cost $5.50 this year. That’s inflation.
The inflation rate has increased so much this year for several reasons. First, the price of crude oil has risen because of the Ukraine war. The recent agreement among the OPEC member nations also cut oil output, which will affect the price of crude.
On top of that, a great deal of money has been injected into the U.S. economy because of the federal economic stimuli that took place during the COVID-19 crisis. Everyday life has pretty much returned to normal after the pandemic lockdowns. People have returned to work, they are eating out again, and the $2 trillion people saved during the lockdowns are now burning holes in their pockets. There are still plenty of shortages worldwide because demand far exceeds current supplies. As a result, prices go up and up and up.
Why Is Real Estate Promoted as an Inflation Hedge?
Real estate is promoted as an inflation hedge for many reasons:
- As home values rise because of inflationary pressures, fixed-rate mortgages stay the same. An investor’s equity in the home increases without mortgage costs increasing.
- Renting out properties with short-term leases can be especially beneficial during times of higher inflation. This especially holds true with multifamily dwellings, where the annual turnover rate is almost 48%. If a property owner can raise rental rates regularly while mortgage payments stay the same, there’s an opportunity for increased income to balance out the rising inflation rate.
- Over the long term, real estate increases in value — in spite of the ups and downs of the economy. Real estate prices collapsed in 2008-2009. But in less than 10 years, prices recovered to levels previous to the Great Recession.
If real estate is an inflation hedge, why are properties declining in value?
Month-to-month changes in the value of property do not make a trend. Take 2022 so far as an example. Although housing prices have declined over the past few months, they are still 8% higher than a year ago. Considering the reasons already discussed — and in spite of monthly ups and downs — real estate can indeed serve as an inflation hedge for investors.
Read next: Can't Buy Real Estate in 2022? Consider Fractional Ownership And Invest With As Little As $100
