In inflationary times, currently the highest in 40 years, the purchasing power of your money diminishes each day; essentially, buying you less. The biggest threat is to be without capital assets, like a home, that are benefiting from the increase in prices.
Your money buys less gasoline now, than it did a year ago, by close to 50%. Beef prices are up about 20% since last year. Used cars are about 35% more expensive than they were a year ago. Mortgage rates are near 5% after reaching their lowest of 2.65% in January 2021.
And then, there is the price of houses. CoreLogic reports that home prices increased year over year by 20% in February 2022. Their Home Price Index indicates an annual five percent increase in prices from 2014 to 2021.
For many people, the American dream of owning a home is slipping away. Adjusting your expectations for the perfect home and when you expect to achieve it, can be a legitimate, long-term strategy to making the dream come true. By delaying the gratification of getting everything you want in a home now and making compromises that would allow you to stair-step your way into the "forever home" could be the plan to incrementally reach your goal.
Owning a home in today's market, even if it isn't the ultimate home, provides a significant hedge against inflation. Not only is the home appreciating faster than the rate of inflation, the mortgage on the home produces leverage that increases a homeowner's return on their equity.
Homeowners have both the home's appreciation and its amortization working in tandem to increase their equity. Money in a bank account or the stock market can't compare to the potential.
$40,000 invested in a certificate of deposit earning 1% would be worth $42,040 in five years. If the same amount was invested in the stock market that earned 6% annually, it would be worth $53,529. However, if the $40,000 were invested in a $400,000 home, with a mortgage at 5% for 30 years, that appreciated at 5% annually, the equity would be close to $180,000 at the end of the same five-year period.
Connect with us and let's put together a plan to help you benefit from inflation.