WHAT IS INFLATION?
Inflation is when a currency loses its buying power, causing prices in the economy to go up. Year-over-year consumer inflation in the economy has been running around 8.5% throughout the past year. That’s the highest inflation rate we’ve seen since the 1980s. In fact, through much of the past 15 years, annual inflation has been running below 2%. That’s why the recent price increases have been such a shock.
HOW DOES INFLATION IMPACT HOUSE PRICES?
House prices tend to go up along with all the other asset prices in the economy during periods of high inflation. During the last period of high inflation, from 1970 – 1989, the average increase in house prices was 7.64% per year. During the past 20 years of low inflation, from 2000 – 2019, the average increase in house prices was 3.70% per year. House prices tend to go up at a faster pace during periods of high inflation. That’s why real estate is often referred to as a “hedge against inflation.”
HOW TO BENEFIT IN A HIGH-INFLATION ENVIRONMENT?
The best way to benefit from the current inflation scenario is to buy real estate and use a large mortgage (if you can afford it). That’s because the mortgage balance remains the same or goes down as you make your monthly payments, while the property increases in value. The good news is that mortgage rates are still relatively low… lower in fact than the annual inflation rate. This makes buying real estate in this environment even more attractive.
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