The US housing market is getting harder to break into, but for those who have, the rewards have frequently been enormous.
Real estate retains more of its value during periods of high inflation than other investments, such as stocks, according to investing experts, which has long been cited as one of the best reasons to purchase real estate.
That has been the case during the past two years’ surge in inflation. According to data from the Federal Reserve, between 2019 and 2022, the median value of a home increased by 44%. This is defined as the value of the home less any loans against it, such as mortgages. In that analysis, the Fed took into account only primary residences.
The median net worth of American homeowners was $396,000 at the end of 2022, compared to $10,000 for renters, primarily because of this.
Having a hedge
For Black and Hispanic individuals, the majority of the average wealth gains between 2019 and 2022 came from increases in housing wealth.
When dividends paid by index companies are excluded, the S&P 500 index increased by roughly 32% between the end of 2019 and the end of 2022. It was a really good performance, too. However, because of the strong correlation between stock performance and variables such as corporate profits and investor sentiment regarding the direction of the economy, stocks have become more volatile.
Real estate is a very, very strong investment in a low-growth, high-inflationary environment, according to Jamie Battmer. At Creative Planning, a wealth management and financial advisory firm that serves clients with combined wealth close to a quarter of a trillion dollars, he serves as chief investment officer.
He continues by saying that real estate typically performs better than stocks and bonds, even in an environment like the one we are in right now, with strong growth and elevated but not historically high inflation.
Progressively Higher
The net home value of Black, Hispanic, and White individuals increased by an average of 40% between 2019 and 2022.
The housing market is also contributing more and more to wealth inequality as a result of the sharp rise in home values.
Financial experts tell NBC News that despite home prices being at all-time highs and mortgage rates at two-decade highs, they are strongly advising clients to consider buying a home because it’s such a powerful tool for creating wealth, even in hard times.
“People believe that now is not a good time to buy because of the current state of prices and interest rates,” New American Funding’s chief investment officer Jason Obradovich stated. However, he stated that’s not always the case. One explanation is that prices will almost certainly increase in response to a drop in mortgage rates.
Gap in wealth
A homeowner’s median net worth is forty times greater than that of a non-homeowner, a difference that grew by 33% between 2019 and 2022.
Real estate prices have increased significantly despite the lack of significant inflation, according to Obradovich.
In 1980, the yearly rate of inflation was slightly higher than 14%. In the same year, mortgage interest rates exceeded 16 percent.
“For nearly four decades now, interest rates have been declining, which has positively impacted real estate values as a result of people being able to afford larger payments.”
Lower interest rates, according to Obradovich, are unavoidable since the Fed is aware that growth in the U.S. economy depends on them.
“You can refinance at a much lower rate when rates come down,” he stated.
Prices will probably rise again when rates drop because getting a mortgage will be less expensive. This implies that purchasing now rather than later may be preferable for those who can afford it.
He made reference to the cost of renting when he said, “If you rent, it will probably always go up.”
Battmer and Obradovich both brought up the subject of how a person’s house can affect their long-term financial situation. They both agreed that a house serves as a sort of forced retirement savings account for a lot of people. They increase their equity in the home with each mortgage payment they make, and the longer they own their homes and the longer prices rise, the more value they can obtain from borrowing against the value of their home through home equity loans.
“Owning a home is still the great American dream, and it’s a major factor that drives wealth for the average household,” stated Battmer.
