“If you’re worried about inflation, you’ve definitely got to buy a house,” warned the financial podcaster Amrom Langer was listening to. Amrom earned a solid salary as the warehouse manager for a large housewares company, but the cost of living was skyrocketing. Everything his family needed had gotten more expensive—including their rent. But buying a house was a major commitment which intimidated him. Home prices were through the roof now too.
Amrom wondered, what role does real estate play in a family’s financial stability, especially the inflation equation?
Residential Real Estate: A Multifaceted Tool
It is well known that real estate can be a great investment. But its financial usefulness goes much deeper than just potential returns on investment. Every human needs shelter, and buying a roof over one’s head locks in the price of a major lifelong cost. This inflation-hedging component is extremely valuable even if the price of property does not skyrocket after purchase. Interestingly, the Gemara, written thousands of years ago, was already teaching us about hedging household expenses! Also, because most people buy their homes with massive amounts of debt, the purchase can turn into a real winner during inflationary periods.
Inflation Protection
On a basic level, it’s logical that houses should do a good job keeping up with inflation. Inflation means the cost of goods and services rises relative to the value of a dollar. Buying a house is a form of switching dollars into a whole lot of hard assets or goods (land, concrete, lumber, pipes, sheetrock, flooring, appliances, etc.) and services (the professional talent and labor that goes into building a house). Over time, the value of well-located real estate should at least rise with inflation, and historically this has indeed been the case.
Price Rise “Insurance”
Of course, there’s a lot more to real estate pricing than inflation; localized supply and demand factors will often have a much larger effect. New York’s real estate market is very different from Detroit’s, for example, even though both have the same exposure to the US dollar. Likewise, Lakewood’s explosive housing market has little to do with national inflation statistics. But whatever is driving home prices, buying locks in the cost of housing. This protective hedge is extremely valuable, beyond basic calculations of returns on investment. And like insurance, even if home prices don’t rise drastically after purchase, there’s a significant benefit to the protection even if it’s never used.
Hedging is Safe and Savvy
In a similar vein, the Gemara recommends that people grow their own food because this food is blessed (Yevamos 63a). How does this reconcile with another gemara on the same page that says that farming offers relatively little financial reward? Rashi and Tosfos explain that farming enough food just to cover the household’s needs is part of a bracha. Perhaps this is partially thanks to the protection from the occasional food shortages and resultant price spikes. One drought can wipe out even the wealthiest person if they need to pay top prices for enough food to survive (as in Yosef’s times in Sefer Bereishis). A bit of farming—not for general parnassah, but as price “insurance”—is therefore a wise move.
Ancient but Fresh Wisdom
It’s also interesting to contemplate that when major corporations hedge the costs of the commodities and raw materials they use to run their operations, they are probably practicing financial strategies from a very long time ago. It’s likely that almost everyone in the Gemara’s time owned their home, thereby hedging both the costs of food and shelter (again, see Tosfos there.) The same lot of land used for household farming could be used to keep a roof overhead too. The sages of the Gemara seemingly believed in financial hedging and, as always, the Gemara’s advice is still fresh and powerful.
Marvelous Mortgages
With modern government-backed mortgage loans, buying a house to hedge the cost of shelter is especially doable. We take it for granted, but today’s mortgage loans are truly amazing deals. Even those with modest incomes and assets are able to borrow vast sums of money at extremely favorable rates and terms. From an inflation perspective, locking in low rates for decades is an unbelievable risk on a mortgage lender’s part. If inflation rises significantly over the life of loan, the repaid money is much less valuable and the lender has lost significant (real) wealth.
Inflation is Icing on the Cake
On the flip side, a long-term mortgage borrower who locks in rates beneath inflation ends up winning big-time. The dollar amount of the 360 payments being made will be identical, but the real-world value, or purchasing power, of those dollars is constantly falling. Inflation is in essence a discount on the debts owed—in favor of the borrower and at the expense of the lender. We already touched on how the potential growth and hedging power makes owning a home a valuable inflation-fighting tool; the ability to repay housing debt with devalued dollars is the icing on the cake!
A Housing Plus Inflation Example
Consider an example. Amram buys a $500,000 house using a 30 year $400,000 mortgage with 3% interest. The monthly payments (principal and interest) equal $1,686, which happens to be one fifth of his $8,430 in monthly household income. Now, say inflation hits 6% annually for 10 years and his household monthly income and typical expenses grow accordingly. For the most part, he’s in the same place financially—even though the number of dollars brought in and expended has changed, his purchasing power has remained the same. Except for one thing—his fixed monthly mortgage payment.
At year 10, with 6% inflation, Amram’s monthly salary would be $15,096, but his mortgage payment is still locked at $1,686. Housing’s bite, as a percentage of his monthly income, fell from 20% to just 11% ($1,686 mortgage / $8430 salary = 20% vs. $1,686 mortgage / $15,096 salary = 11.1%). By year 20, the percentage of salary spent on housing amounts to just 6%. The right to pay out a mortgage over many years offers a significant opportunity for home buyers to profit at the expense of lenders.
(Note: this doesn’t account for property taxes and maintenance, which are exposed to inflationary effects.)
A Silent but Steady Winner
Even if Amram’s salary does not rise with inflation, buying a house remains an inflation hedge. At least, his mortgage burden won’t rise due to inflation or local supply and demand issues, whereas those renting could be hit with ever-rising housing expenses. Also, the value of the house will probably at least keep pace with inflation. A $500,000 house would be worth almost $3 million after 30 years of 6% inflation. Not bad for an investment that required a $100,000 down payment! These factors add to the list reasons why, over the long run, owning a home makes sense for most families.
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