Home buying: a hedge against inflation

For Silicon Valley renters, it seems like no end is in sight to rising housing prices.  As long as Apple, Google, and other big players continue to recruit large numbers of well paid employees, there will be fierce competition for apartments, condos, and other rental properties, and that will put upward pressure on rental costs.  I get Google alerts for a few keywords, including my town of Los Gatos.  Many days I see a Craigslist ad for available homes to rent and am shocked that such small square footage could command so big a price for rent. I wonder if many long term renters do not understand that home buying is a hedge against inflation.

One of the many benefits, and perhaps most underappreciated one, of home buying is to get control of your future housing costs.  Renting a home is a little bit like having an adjustable rate mortgage: you just don’t know what it may cost you in the future.  Purchase a house or condo with a fixed rate loan and your mortgage cost will be set and your property tax can only go up 2% a year (unless your taxes went down for a period and then readjust upward when the market recovers).

 

Home Buying a hedge against inflation

 

The longer you stay put, the more of a bargain it becomes while prices appreciate. But to get to that point, it’s imperative to take the long view.  Sacrifices will have to be made in terms of how nice the bought home will be (nearly always not as nice as what you could afford to rent) and the effort required to take care of a home.  But look down the road 10 or 20 years and you will find that owning then is a real bargain compared to renting the vast majority of the time. Home prices here have doubled in the last 15 years!  Folks who purchased then are in at half price now.  You will commonly hear them say “I could not afford my own home now”.  They had to make that leap then to have a comfortable cost of housing now.

Here’s an old ad from July 15, 1948, to illustrate the point about appreciation of home values over time.

 

Los Gatos real estate ad from 1948

(more…)