Purchasing a second home as a hedge against inflation

Published Date: January 5, 2023

Resort buildings and boat docks line the channel of Bay Harbor, Michigan, embodying why it’s one of the best places for a second home.
Inflation has reached its highest level since 1981 as the latest Consumer Price Index (CPI) increased 9.1% in June. In addition, mortgage rates in April surpassed 5% for the first time in over a decade and have remained elevated since.
Line graph showing the change in the Consumer Pride Index and 30-year fixed mortgage rate.

Why does this matter?

This is the first time in recent history that inflation is meaningfully higher than mortgage rates. As the cost of consumer goods in the U.S. rises faster than mortgage rates, there are financial decisions consumers should consider to hedge against inflation. Many advocate putting money into long-term assets such as real estate, including second homes, as a way to hedge against inflation.

What about the high mortgage rates?

Although mortgage rates have nearly doubled since the start of 2021, it is important to remember that rates are still well below historical norms. For the past 50 years, 30-year fixed mortgage rates have averaged approximately 8%, even crossing above a staggering 18% in the early 1980s. 

Will inflation continue to rise?

Inflation has reached levels we have not seen in over 40 years. Many economists believe that the CPI will remain elevated for the rest of this year and may hold up into 2024.

What’s the takeaway?

As inflation rises, the cost of everything goes up, including real estate. However, when the CPI growth rate is higher than the current 30-year fixed mortgage rates, homeowners’ will be spending the same monthly amount but with inflated dollars. As a result, smart home shoppers tend to be less concerned about the current levels of mortgage rates when inflation is high. This could provide home buyers with a rare opportunity to make a stable-value investment and take advantage of the growing rate of depreciation of money. In an inflationary environment, consumers want to park their money somewhere that will lose the least amount of value. For that reason, real estate is often considered one of the best ways to hedge against — or beat — inflation. Disclaimer: This content is published solely for informational purposes and it is not intended to be investment advice.

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