Inflation Home Prices Boston

Inflation and Real Estate Prices

A mortgage1 is one of the best financial product inflation hedges ever created.

What do I mean by inflation hedge?

Let’s call it protection against inflation, or totally outside of the effect of inflation.

Generally, the cost of goods and services creep up over time. 

You’ll agree that hourly rates for residential plumbing services increase each decade. And premium home appliances: Viking and Thermador stoves, Bosch dishwashers, and Subzero refrigerators tend to cost more year over year and are harder to find when you need them.

An architectural-shingled roof costs more in 2024 than it did in 2004 or 2014. 

A well-appointed E.V. or SUV for your garage can push 6 figures. Do you remember when a Cadillac Escalade would be expensive at $50,000? Now that equates to a base Honda Pilot.

The point has been well driven home now; Facebook and Twitter have saturated you on the topic. If the Fed’s chairman Jerome Powell takes note of the direction of a falling leaf, photographers will fill their memory cards with images of this silver-topped bespectacled man pondering the coloring of the carotenoids.

The Federal Reserve seems hell-bent on corralling the topic even at the risk of tanking the economy. They may know that inflation can increase exponentially, in startling swift order. And they may also know that a tanked economy is analogous to a mouse sitting on the pan of a balance scale raised comfortably above the slammed side of the scale depressed into the ground with a Maine Coon cat overflowing the tray.

During the Great Depression in the United States, it was said that 8 out of 10 families lived life as normal and took virtually no note of the occurring economic calamity. Dire pictures of Wall Street, breadlines, and other misfortune persist 11 decades later, but glance across the isthmus today to see this:

Now picture which side of the scale is the mouse or which is the Coon cat?

To magnify the situation for clarity (and then reduce it back down at the conclusion) let’s look at 1,000% inflation.  1,000 percent is a 10x factor on a cost, over time. My parents bought their house the year I was born (1970) for $30,000. They did some light DIY remodeling but never expanded it, or functionally improved it really. The asbestos-wrapped furnace did get replaced and my father took 4 years to paint it (one side per year). But they never added bedrooms, refinished a basement, or even had to replace the roof or knob & tube electrical system. We lived in it, enjoyed it, and received safety and comfort yet we didn’t improve it. I state this so it takes away the variable of the appreciation (inflation) being caused by say, adding a family room plus an extra bathroom with a master suite bedroom over it. Luxury for our family was clean windows and well-cared-for houseplants.

Flash forward 3.2 decades and my father has graduated to his next life and my mother determined the house and its deferred improvements too much to handle. With only broom clean prep, the house sells for 1,000% appreciation = $300,000. 

The mortgage debt? Previously eradicated through the scheduled monthly payments only had a payment of just over $200 (two hundred). 

It was like the monthly payment was in a time capsule. Or more visually, the original mortgage document frozen in the middle of a block of ice that took 3 decades to melt.

Now flip over to the other way to occupy housing, renting. Apartment rentals. Monthly leases. Condos for rent. Now, more than ever, single-family homes are on the Facebook Marketplace for over $3,000 a month. The owners prize a mortgage interest rate of 2 or 3 percent too valuable to give up by selling the home, now they buy another house and simply “rent out” their departure residence – further restricting the available inventory for sale.

Some rental leases are tied to the Cost-of-Living index. Bumps in inflation equate to bumps in rent. It’s like the clicks on a uni-direction ratchet where very seldom would the Cost of Living decrease, if ever. Rents that started at sub $1,000 in the early 2000s are now indexed up or re-rented at market rate to an astonishing $2,000 (loose average based on street-level conversations). 

Imagine a long straight road adjacent to railroad tracks.

The road represents the mortgage and the tracks represent the value of a home or the cost of an apartment rental. Both the tracks and the road start in 2023 and they both terminate at 100% percent inflation. 

In raging hot real estate markets, that train has hit the value of “doubling” in just 3.6 years (2027). Coming out of a crash or a recession can stretch that doubling to 10 or 15 years (2033 – 2038).

But across the median, the mortgage? That car hasn’t left the starting line. It’s parked. Might as well not have any wheels, or if it did, they’d be on motor-in-place wheels like a dynamometer if you know cars.

Inflation goes up. The mortgage stays put.

In Summary: always Lock-In your mortgage rate. Doing so allows you to trap in today’s standards. Today’s standards become yesterday’s dollars, in the future. Not much else works that way. Everything else is pay-as-you-go. Plan on buying shares of stock of the same company each month over the course of 30 years? You’ll pay more for the stock shares in the future years (most likely) than you will at the onset of the campaign. If at the same time, you also buy a house or rental property, the payment (not including tax and insurance) would be consistent across the lifespan of the mortgage. 

1 For the record, this article applies only to Fixed Rate Mortgages – not ARMs, not HELOCs, not Reverse Mortgages, and certainly not “equity sharing” arrangements like Unison, Point, or Hometap. While ARM’s HELOCs, reverses and even equity sharing are types of mortgages and may sometime appear in first position, they are not part of the inflation hedge I’m writing about here.