Josh Lewis, BuyWise Mortgage and Dustin Steeve, CEO, Lighthouse Escrow discuss how to become a homebuyer on this fifth part of seven about the basics of what you need to understand to become a homeowner.
Josh answers the question, “How well does a home serve as a hedge against what could be upcoming inflation?” How do low interest rates and changing rates affect affordability?
– The market’s uncertain, pandemics create uncertainty, elections created uncertainty, especially, since it seems that, a Democratic party has a very different philosophy with regards to taxation, et cetera, than the Republican party.
And it’s not clear what’s gonna happen with future stimulus packages, all the rest. How well does a house serve as a hedge against terrible upcoming levels of inflation?
If you think we’re gonna, that question assumes, upcoming levels of inflation. Let’s just assume for the sake of the argument for a second, that that question is accurate and there will be levels of inflation, rising.
How well do you think house hedges against that?
– Historically, it is has done very well, because if you look at home price appreciation and charted against inflation, there was a pretty high correlation between the two. I do not think that will be true, going forward.
And the reason for that, is what we’ve seen over time, is, that, largely people don’t buy, don’t pay for the price of a home. If you’d told, like, it’s funny, I do some of these interviews on YouTube with people that have nationwide audiences.
When we talk about entry-level homes for 800 or a million dollars in Southern California, and they’re like, “Are you nuts?” And, the only way that an entry-level home can be 800 or a million dollars, is that people can afford them. We have ultra low interest rates.
You go from 1990, 30 years ago, plus or minus 10% on an interest rate, to right now, plus or minus three percent on an interest rate. So, that home, is so much cheaper to own.
So, affordability is a function of two things, interest rates and overall incomes, incomes for people who have not been adversely affected by the pandemic are still really high.
Rates are really low. People in general, what you want to chart and what you see say stay relatively stable over time, is the percentage of household income that goes to a mortgage payment.
So, when rates are low, home prices can go up, because that percentage of household income going to a mortgage payment stays stable.
Now, if we see inflation, and that forces interest rates higher, now, you’re seeing, the cost or the percentage of household income that goes to support a monthly mortgage payment, goes higher and home prices will have to adjust downwards.
We can’t have both, affordability will not allow, there to be high inflation, which would lead to higher mortgage rates and an increase in home price value.
So, I would not count on housing as a hedge against inflation.
Now on the flip side, I would say with almost near certainty, we have zero risk of inflation coming in the future, but that’s a longer discussion.