What is a better hedge against inflation than Real Estate? Do you remember when home prices were quite similar to today’s car prices? According to data released 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.
In 2013, which is fifty 50 years after the original 1963 year used in the 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 was below the median home sales price of ten years ago (2003 – $181,700).
Per the National Association of Realtors (NAR), the median priced existing home sale nationally reached $201,700 in April of 2014, which is directly due to a combination of near all-time record low interest rates, artificially suppressed home listing inventories, increasing inflation rates, and a rapidly declining U.S. Dollar. So, the median priced U.S. home sold in 2014 finally surpassed the last housing market peaks back in 2003. Will Homes, Multifamily Apartments, Land, and Commercial Real Estate seem relatively cheap today as compared with 5 or 10 years from now as these home appreciating trends continue onward?
Inflation to the Rescue
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. For many investors, asset deflation (i.e., real estate and stocks) like seen in Japan during the 1990s is a much worse possible economic outcome than rapidly increasing asset inflation as seen here in the USA these past few years. For assets like Real Estate, inflation tends to be a positive ally.
Since bank savings rates today offer customers effectively negative returns, the higher returns offered in the stock and real estate markets seem much more appealing. The recent 17,000+ Dow Jones index levels are a prime example of 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. However, rapidly increasing consumer goods inflation found at the local supermarkets, gas stations, or clothing stores are not a welcome inflation “side effect” related to Quantitative Easing (QE) strategies for most Americans.
Inflating Rents & Apartment Prices
According to the CPI (Consumer Price Index) inflation calculator, inflation has averaged 4% between 1950 and 2000. $1 in 1950 was later equivalent to $7.14 in 2000 thanks to a weakening Dollar, and increasing rates of inflation over time. These annual numbers equate to 4% annual compounding rates.
Income properties such as Multifamily Apartment buildings are valued based upon income primarily. If the monthly and annual income increases, the overall property value will increase as well. As such, CPI inflation, rents, and overall property values tend to increase simultaneously, which bodes quite well for Rental Real Estate properties.
One of the most tremendous benefits associated with investing in Multifamily Apartment buildings during rapidly increasing inflation time periods like in recent years is that investors and owners may see increasing amounts of equity gains in their properties. Higher property values also equates to much better collateral protection for investors or lenders in these same types of rental properties at much lower LTV (Loan to Value) Ratios. If high inflation trends continue in the near and long term, then today’s relatively low apartment rents and overall property values may also seem relatively cheap over the next 5, 10, or 20+ years.
Hope you enjoyed reading, Real Estate: An Exceptional Inflation Hedge!