It’s becoming increasingly difficult to enter the U.S. housing market, but for those who manage to do so, the benefits are often significant.
Investment experts have long said that one of the best reasons to buy real estate is that it retains its value better than other investments, such as stocks, during times of high inflation.
This was also the case during the inflation spike of the past two years. The Fed reports that the median home value (the value of a home minus mortgages and other loans) rose 44% between 2019 and 2022. The Fed considered only primary residences in its analysis.
Primarily for that reason, the median net worth of U.S. homeowners at the end of 2022 was $396,000, while the median net worth of renters was $10,000.
The S&P 500 index rose about 32% from the end of 2019 to the end of 2022, excluding dividends paid by index companies. It’s also a strong performance. But stock prices have become more volatile, in part because stock performance is closely tied to factors such as corporate profits and investors’ views on the future of the economy.
“In a low-growth, high-inflation environment, real estate is a very strong investment,” said Jamie Butmer. He is the Chief Investment Officer of Creative Planning, an asset management and financial advisory firm where together he works with clients with nearly $2.5 billion in assets.
He added that even in today’s climate, where growth is strong and inflation is rising but not as high as it was a year ago, real estate tends to perform better than stocks and bonds.
Rapidly rising house values also mean that the housing market is contributing increasingly to wealth inequality.
This is such a powerful tool for creating wealth even in a recession that financial experts told NBC News that buying a home even when prices are at an all-time high and mortgage rates are at a 20-year high He said he is advising his customers to strongly consider this.
“People’s perception is that this is a bad time to buy given the level of prices and interest rates,” said Jason Obradovic, chief investment officer at New American Funding. But he said that’s not necessarily true. One reason is that if mortgage rates fall, prices will likely rise accordingly.
“There has not been significant inflation, but real estate prices have increased significantly,” Obradovic said.
In 1980, the annual inflation rate was just over 14%. Mortgage interest rates in the same year exceeded 16%.
“Interest rates have been falling for about 40 years in a row and people are able to pay more, which obviously increases property values.”
Obradovic said lower interest rates are inevitable because the Fed recognizes that lower rates are necessary for the U.S. economy to achieve any growth.
“If interest rates come down, you can refinance at a much lower rate,” he said.
When interest rates fall, it becomes cheaper to get a mortgage, which can cause prices to rise again. So for those who can afford it, it may be better to buy now rather than wait.
“If you rent, it’s probably always going to go up,” he said, referring to rents.
Obradovic and Butmer both made similar points about the role housing plays in people’s long-term household finances. For many people, the pair said, their home becomes a kind of forced retirement savings account. Every time you make a mortgage payment, the equity in your home increases, the longer you own your home, and the longer the price goes up, the more likely you are to take out a home equity loan or borrow against the value of your home. By doing so, you will be able to get more value. House.
“The great American dream of homeownership is alive and well, and remains an important factor in creating wealth for the average household,” Butmer said.