Historically, investing in real estate has been one of the best investments to counteract high rates of inflation.
Despite the government’s claim of 3% to 4% annual rates of inflation, my personal experience says that the real price of gasoline, food, water, and utilities has skyrocketed in recent years.
When inflation rates are high, the Federal Reserve usually likes to increase interest rates to slow down high rates of inflation. On the flip side, low rates of inflation may then lead to lower interest rates.
But today we have both record-low interest rates and increasing inflation, which is leading to increasing home prices once again.
Historical Median Home Sales Prices: The Past 50 Years
According to data published by the U.S. Census Bureau, the median priced U.S. home sold in January of 1963 was just $17,200.
Ten years later in January 1973, the median U.S. home was still a quite low $29,900. Twenty years later in January 1983, the median U.S. home price increased significantly to $73,500.
Thirty years after the original 1963 date, the median U.S. home price finally crossed the $100,000 threshold level as it reached $118,000 in January of 1993. Forty years after the 1963 date was reached in January of 2003, the median U.S. home price reached $181,700.
Today in 2013, which is fifty 50 years after the original 1963 year used in my study for this article, the median U.S. home sales price reached $170,600 (according to the National Association of Realtors).
Sadly, the median U.S. home sales price in 2013 is below the median home sales price of ten years ago (2003 – $181,700).
“Upside Down” or Ride The Inflation “Wave” Again
Numerous housing studies on “upside down” properties note that people are more likely to walk away from their home when their existing mortgage debt exceeds their current market value. Whether an “upside down” or over-indebted homeowner tries to use a “Strategic Default,” a “Short Sale,” or a conventional home sale, the owner may not benefit financially.
Additionally, neighboring homes may be adversely impacted by another distressed foreclosure sale in the neighborhood.
What is one of the best ways to improve real estate besides inflation? Leverage. Many investors who are not all cash buyers leverage the purchase of their home with loans up to 90%, 95%, 97%, or even 100% with a third party bank loan or a form of seller financing.
This is the true beauty of real estate’s ability to act as a great hedge against inflation:
If I invest just 5% down on a $100,000 home, then I have 95% leverage. I have tied up a $100,000 asset with just $5,000 down (excluding closing costs). If my home appreciates 5% in 2013, then my home may later be worth $105,000. As a result, I just earned 100% on my cash invested in the home in one year (or $5,000 appreciation on a $5,000 down payment).
When home values increase, existing homeowners have more incentive to stay with their properties. If fewer people choose to allow their lenders to foreclose upon them, fewer foreclosures means better overall home values for each and every neighborhood nationwide.
A combination of record low interest rates and more access to government backed mortgage loans such as FHA will also allow more borrowers to qualify for larger loan amounts. The more borrowers who qualify for larger loan amounts will then drive up home sales prices for the existing homeowners.
The majority of Americans derive their net worth from real estate. If home prices increase, property owners tend to get happier and then spend more money on other consumer items, which stimulates the overall U.S. economy.
Inflate or Die
As I have written before, the Federal Reserve and U.S. government have tried to stimulate the U.S. economy by flooding the markets with cheap money, so that they and U.S. consumers may invest in more stocks, bonds, real estate (properties and mortgages), and other assets in order to try to inflate our way out of this financial mess or “Credit Crisis,” which officially began in the Summer of 2007.
Since bank savings rates today offer customers effectively negative returns, the higher returns offered in the stock market and real estate market seem much more appealing.
The recent 14,500+ Dow Jones index levels are a testament to the success of the strategy of “Quantitative Easing” (create money out of thin air in order to buy assets), “Operation Twist” (drive interest rates even lower), and other types of intentional rigging and manipulation of the financial markets.
Since last year, we have seen how home prices have begun to increase once again due to the combination of record low interest rates. Home listing inventory levels are down near 19-year lows. And investors are looking to earn decent yields well over their negative net returns offered by their local banks’ savings accounts.
From Bust to Boom Again?
Nationally, the median U.S. home sales price increased 5.9% between the end of 2011 and the end of 2012. This 5.9% home appreciation figure in 2012 was the largest home price increase since August of 2006.
Historically, U.S. homes have increased an average of about 3% per year so the 2012 median price increase was almost double the typical annual home inflation rate.
Today’s bidding wars on numerous properties for sale, due to the unusually low home listing supply, and continued record low interest rates have continued to drive home prices higher in 2013.
As long as interest rates and home listing supplies remain low, we should hopefully inflate our way out of this financial mess one way or another. Don’t be surprised to see 2013’s home appreciation gains possibly even exceeding 2012’s!
The U.S. economy needs a healthy, solid housing market in order to get back on track, so let’s all hope for continued positive news for the real estate and financial markets.