Inflation, Low Rates, and Home Appreciation

The combination of inflation and low mortgage rates usually leads to much higher compounded rates of home appreciation. For owners of property, high rates of inflation and appreciation are welcomed and appreciated. For buyers or tenants, however, the skyrocketing purchase and rental prices are not liked much at all.

Rapidly increasing rates of inflation are not very helpful for our consumer purchasing power for basic goods and services like food, utilities, dining at restaurants, or gas or transportation prices. However, the best traditional hedge against inflation is, was, and probably always will be something called Real Estate. This is true partly because home values tend to increase at least as much as the reported annual rates of inflation.

Using the old investment formula called The Rule of 72, investors can quickly calculate how soon their investment will double in value by dividing the number 72 by an estimate of annual appreciation gains. In many boom markets over the past few decades, especially in California and other popular housing regions across the U.S., values have appreciated by anywhere between 7% and 10% per year over the period of five to 10+ years.

A home that appreciates at 10% per year (72 divided by 10 = 7.2 years) may double in value every 7.2 years during a more solid economic “boom” era. Another home that appreciates 7% each year can double in price every 10.2 years during a relatively strong economic time period. Or, a home appreciating in value just above the historical inflation numbers at 5% per year is quite likely to double in value every 14.4 years.

Over the past 50 years or so, a significant amount of family generational wealth has been created by buying and holding onto one, two, three, five, 10, or 20+ homes while benefiting from the magical power of compounding inflation and homes appreciation gains.

During a 30-year mortgage term, a home can double in value two, three, or four plus times. The quick or slow appreciation percentage rates for homes and other types of real estate are dependent upon a wide variety of factors such as buyers’ demand, the availability of affordable third party loan sources, the local housing inventory supply, quality property location, and local and national unemployment trends.

While the most common mortgage loan is typically for a 30-year term, the average hold time for a mortgage on a home is 10 years prior to the homeowner selling the property, paying it off in full, or refinancing with another new mortgage. This is a major reason why the 30-year fixed rate is tied directly to the movement of 10-year Treasuries, or the 10-Year Treasury Constant Maturity Rate. In recent years, 10-year Treasuries have hovered at or near all-time record lows right alongside 30-year fixed mortgage rates.

The most important factor which usually determines whether or not a housing cycle is positive, negative, or flat is directly related to the cost and the ease of availability for third party capital sources such as banks, credit unions, and private money funding sources.