Why Housing May Not Be A Good Inflation Hedge This Time

Why Housing May Not Be A Good Inflation Hedge This Time

With U. S. inflation surging to a four decade high, investors are seeking assets that will protect them against it. Traditionally, real assets such as gold, commodities and real estate have played that role, while financial assets – both stocks and bonds – have not held up as well. This rendering dates back to the 1970s, when inflation and interest rates soared to double digits and real assets outperformed financial assets handily. As housing prices rose by 2 ½ times during the decade, investors began to view homes as speculative investment vehicles. The underlying conditions for the housing market today, however, are different from the 1970s. While mortgage rates were much higher then, so were inflation rates. Tax breaks from owning homes were also greater than today, and homes were viewed as a tax shelter as marginal tax rates for households were 73% for the highest bracket. Therefore, investors need to weigh whether housing will be as good an investment vehicle going forward. The principal reason for believing it will be is that demand-supply conditions in housing have been very tight. Following the 2007-2009 bust, new starts plummeted to nearly 400 thousand units from more than 2 million units during