Inflation and Housing flyer S Carrigan by stevec56


									Inflation and Housing
Home Economics 2009

Home Economics Chart 2009

Many pundits are sounding the warning bells for impending inflation. They cite the expansion of the Fed's balance sheet ("printing money") as being the real roots of inflation. As we've recently been in a deflationary environment, preventing further price drops through accommodative policy is exactly what the Fed has been doing. At least for now, this makes inflation a good thing. Yet, inflation erodes the purchasing power of our money and causes bond investors to demand a higher yield on their investments. This translates into higher mortgage rates for homebuyers and one of the reasons too much is considered to be a bad thing. Higher mortgage rates do negatively impact affordability, yet real estate has also maintained a margin above other price increases. The chart above evidences a median priced home purchased in 1963 and its value increase since. The dotted green line, shows where that value would have been if it only rose with inflation (measured by the Consumer Price Index). Why? 1.) The replacement cost (land, materials & labor) of a well maintained home rises at least with inflation. 2.) Land and homes are a commodity. As the population rises, so too does the demand for them and hence, the price. Proximity or location factor here too. Property closest to metro areas or centers of employment, mass transit, the best schools or cultural benefits will often enjoy greater demand and higher rates of appreciation. Conclusions: If rates are rising due to inflation, typically, so too would the value of your property. In other words, if you're paying more in interest, you're often earning even more in equity appreciation too. Historically, homes and land, have actually been one of the best "hedges" or protection against inflation that you can possess. Imagine locking in the price of gas for 30 years when it was just a dollar a gallon? Today's homebuyers may have a similar opportunity to lock in low rates with the extra benefit of a low purchase price. What few of the pundits explain is that when you lock into a low payment, the cost will actually fall as inflation decreases the real cost of your payment. We've witnessed upsets to the norm lately yet over time, your income should rise while your loan payment stays the same and as the years go by, your original loan amount as a percentage of the value of your home gets smaller and smaller. In this case, inflation will actually be working for you.

Steve Carrigan, CMPS CLA
Carrigan Financial Group Platinum Home Mortgage 805-389-0282 ext 206 FAX 805-389-0292


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