For years, homeownership was the one asset you could always rely upon to protect you from loss of dollar purchasing power. Historically, as the purchasing power of the dollar diminishes, the cost of building a new house increases. Today, even if a home was built 30 years ago, its current market value would be indexed to the cost of building a new home, adjusted for a home's condition and location.
For example, if a home costs $85K in 1990, (30 years ago), it might easily be worth $250K in today's market. The increase in price is mostly caused by inflation. Said another way, over time your monthly house payment shrinks in relation to your monthly income, making your house payment more affordable. Then at year 30, your mortgage is paid off, versus having to make endless rent payments that are indexed to reflect the effects of inflation and supply and demand.
With the current COVID-19 Pandemic Emergency, we find the Federal Reserve once again churning out trillions of dollars of new unbacked money with no end in sight. While markets will bounce around, even deflating at times, the longer-term consequences of massive deficit spending will ultimately help create a rise in inflation and higher real estate prices.
In 2008/9, the big corporate bailouts caused stock values and the cost of real estate to soar. Today's COVID-19 rescue legislation is maybe 10 times the size of the 2008 bailout and that should raise your eyebrow. The real effects of all this new money are yet to be seen, but it doesn't take an Einstein to imagine that inflation could become a growing factor.
Sitting on the sidelines in a rental, that is subject to increasing rents year after year, is not a longtime wealth preservation strategy according to historical norms. Only real estate ownership can lock in and fix your month to month housing cost, and help protect you from price inflation. Renting requires annual contracts that are subject to inflation, and simply accumulates home equity for the landlord.
Mike Askins, Realtor, Owner ARG
Got questions for Realtor Mike? Call me at 214-727-3686 (mobile)