Home Appreciation: Your Best Protection Against Inflation

The Mortgage Bond market continues to pay close attention to inflation, which is a key driver of mortgage rates. Remember, inflation is the arch enemy of fixed investments like Mortgage Bonds because it erodes the buying power of a Bond's fixed rate of return. If inflation is rising, investors demand a rate of return to combat the faster pace of erosion due to inflation, causing interest rates to rise. This is why keeping an eye on inflation remains critical.

The good news is that inflation has cooled considerably after peaking in 2022, with the three major inflation measures (Consumer Price Index, Producer Price Index and Personal Consumption Expenditures) showing significant year-over-year declines in both their Headline and Core readings. Core removes food and energy prices, which are often volatile.

While the rate of inflation has been decelerating, meaning prices are rising at a slower rate than they were, prices are still going up. There is a difference between the rate of inflation slowing versus the cumulative impact of inflation, which consumers feel. This is why news headlines may say that inflation is coming down, even if people feel differently when they’re purchasing goods and services.

Protecting Yourself Against Inflation

One of the best hedges against inflation is buying assets that do better than the rate of inflation and protect your buying power. Perhaps one of the best options is purchasing a home, which is much better than the alternative of renting.

As you can see in the chart below, the net worth of the average homeowner is now 42 times that of a renter ($415,000 vs $10,000). The absolute level of net worth has also grown impressively for homeowners, as homes have appreciated significantly over the last several years.

As a result of higher home prices and higher mortgage rates, the median age of a first-time homebuyer has risen as affordability has become more challenging. Just three years ago, the median age of a first-time homebuyer was 33, but this age has now risen to 38, meaning next year median first-time homebuyers will have been born in 1987.

This also brings demographic implications. When we look at a chart of birth rates, we can clearly see a huge surge in birth rates until 1990, meaning we should see more people over the next several years coming of age to buy a home. And birth rates settled around relatively higher levels in the years following as well, adding to the level of demand.

The bottom line is this growing demand for homes in the near future will be supportive of home prices, as inventory remains tight around the country.

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By The MBS Highway Team