Americans are paying a lot more today for goods and services due to 40-year high inflation, a factor that impacts prices across the board, including for your mortgage and in real estate. Even still, getting in on the housing market now might help inflation-proof your future. Here’s how.

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Key takeaways
  • Although elevated inflation hurts your wallet in terms of everyday expenses, it’s also what helps your home — likely your largest asset — appreciate in value. In effect, inflation can be slowed if you’re a homeowner.
  • The headline inflation rate was 7.7 percent in October 2022, according to the Labor Department.
  • On an annual basis, home prices were up 13 percent as of August 2022, according to the S&P CoreLogic Case-Shiller price indices.

How a home purchase can hedge against inflation

Buying a home can be a hedge against inflation primarily because:

  • As inflation rises, so should the value of your home.
  • The loan-to-value (LTV) ratio of your mortgage will decrease as your home’s value increases over time. In other words, your fixed-rate mortgage payments stay unchanged while your home’s equity rises.
  • If you buy a rental property, you can charge more for rent as inflation pushes prices up.

“Home price appreciation has been a nice hedge against inflation, with home prices growing slightly faster than the rate of inflation when measured over an extended period of time,” says Greg McBride, chief financial analyst for Bankrate. “The recent spike in inflation was preceded by a surge in home prices that insulated homeowners in a way that renters were not.”

Home price gains have come down a bit since the run-up in 2020 and 2021, but still outpace inflation. Home prices were up 13 percent year-over-year in August, according to the S&P CoreLogic Case-Shiller index. Headline inflation, meanwhile, came in at an annual 8.2 percent rate in September, and 7.7 percent in October.

If you get a fixed-rate mortgage, that could help safeguard against inflation, as well. That’s because you’ll continue to make the same monthly principal and interest payment while your home’s value climbs over time.

Likewise, if you invest in a rental property, you could see higher returns.

“While you own the property, if inflation rates continue to rise, so will the value of the home and your rental amount,” says Michael Gevurtz, president and CEO of Bluebird Companies, a real estate lender based in Philadelphia. “This means your profit margins will widen over time. As the prices for all goods and services increase, so can the amount you charge for rent, thereby increasing your return on investment.”

Relationship between inflation and the housing market

There’s a link between inflation and home prices that has become especially pronounced in the current economic environment, as both construction costs and demand have increased.

“Inflation causes materials required for housing construction to rise and serves as a decelerator of supply of new housing in the market,” says Al Lord, founder and CEO of Lexerd Capital Management, based in Summit, New Jersey. “When new construction slows down, the value of existing inventory tends to increase. Consequently, increased demand and moderating supply for housing lead to higher home prices, or housing inflation.”

Additionally, inflation makes it easier to secure financing to purchase a home, as more money is available to lend.

“Because more people can get loans, however, more people are chasing a set amount of houses, which then drives home prices up,” says Joel Ho, founder of InflationTraining.com, which provides education on inflation for companies and individuals.

How does inflation impact mortgage rates?

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Bankrate Insight
To cool elevated inflation, the Federal Reserve raises its federal funds rate, which in turn affects the borrowing cost of financial products, including some mortgages. Generally, in times of higher inflation, mortgage rates rise, too.

“The soaring mortgage rates of 2022 can be tied to inflation hitting four-decade highs and the Federal Reserve needing to aggressively raise interest rates in hopes of corralling inflation,” says McBride, adding that “while homeowners have had some insulation from inflation, homebuyers have not. Rising home prices and soaring mortgage rates have further undercut affordability for many would-be homebuyers.”

The Fed has raised rates throughout 2022. This has an indirect influence on fixed mortgage rates, as well as impacts the rates on adjustable mortgages and home equity products.

Inflation FAQ

  • Inflation is a rise in the prices of goods and services over a sustained period, either due to an increase in the supply of money circulating in the economy or an increase in prices due to higher production costs. Ultimately, inflation decreases consumers’ purchasing power, meaning the dollars in your wallet won’t go as far.
  • Inflation is typically caused by an increase in the cost of manufacturing or production, an increase in money supply or both. It can also be brought on by economic disruptions, such as the recent pandemic-related supply shortages.
  • The Federal Reserve has the power to affect inflation. It often increases interest rates when inflation is higher than desired to decelerate the economy. The Fed can also decrease rates to boost the economy when inflation is considered too low.
  • Inflation is often measured via these indexes: the U.S. Department of Labor’s Consumer Price Index (CPI); the Labor Department’s Producer Price Index (PPI); and the Commerce Department’s Personal Consumption Expenditures (PCE) price index.