Housing and Inflation

Been playing with this.

I don't generally believe that thinking of a house as an investment is the right way to think. I mean, it is one, but it's not really a good one. When house prices are not being boosted by bankers gone wild they only grow at the same rate as wages (which is approximately that of inflation...most of the time). But what they really do is hedge your monthly living expenses against inflation.

If I buy a house now on a 30 year mortgage, my "rent" will stay static for 30 years then drop precipitously. Taxes are likely to change, so that isn't completely right, but that change is small compared to rents. Rents, like houses, tend to inflate with wages, but unlike houses, rents are locked in a year at a time. So next year, rent goes up, my mortgage doesn't. Same the year after and the year after that.

If I can have a mortgage payment that is only a little more than an equivalent rent (my mortgage is about the same or a little less than an equivalent rent) then I start gaining on the up front costs of purchasing after a few years. This is true whether or not the "value" of my house is increasing at a similar rate, or at all, and maybe even if it is falling.

People who plan on moving every 2-5 years don't necessarily get this benefit since the upfront costs to purchase takes a few years to wipe out and in the present economy will likely take a bit longer than normal.

To me this is one of the most important reasons to purchase. I like reading Patrick.net, but many of the rent vs own arguments I see there relate to immediate financials and not long term. If I can purchase a place at $2k/mo (mortgage + taxes + pmi/other) and rent the exact same place for $1700/mo it may look like renting is better (especially when factoring in closing costs), but that only holds for the short term.

This argument, of course, falls flat if we face deflation rather than inflation. So it is still a gamble, but even if you only listen to inflation skeptics (those that don't think we are likely to see high inflation starting in a year to a few years) you won't find many people arguing that we are likely to see much deflation, and that what we do see won't last. In fact many of the same people who have been arguing against buying houses (prices still need to come down!) also argue for buying gold! When it comes to a good hedge against inflation, historically, stocks do better than gold. Investments, however, are with extra money (what you don't need to live on) a is a way to use your monthly shelter payment (rent) as an additional hedge against inflation, and also maybe even as an investment (albeit a weak one).

This argument also falls flat if you buy a house at the wrong time and place, like, say 4 years ago in California. People who bought at the peak of the market may never recover their investment. Of course, people buying then were having to pay much more than what the equivalent rent would be.