On the One Hand: Housing Inflation

On the One Hand: Housing Inflation


Creating money by fiat, as recent federal stimulus has done, could lead to higher inflation.  Inflation sends prices up, whether for food, gas, medical care – or for housing costs. Historically, real estate has been a reliable hedge against inflation and has disproportionately increased in value during inflationary periods.

Are homeowners protected against the loss of purchasing power that inflation would bring?

Lower Interest Rates

In terms of overall ownership costs, homeowners are indeed sheltered from the full impact of inflation. In today’s low interest rate environment, there can be an opportunity to minimize your mortgage interest.  In addition, because housing costs make up 40% of the Consumer Price Index (CPI), a fixed payment mortgage, rather than rent, can shield you from nearly half of the broadly measured impact of higher prices.

Probably the most appealing aspect of today’s environment if you have a mortgage is low interest rates.  If your mortgage has a rate of even 4%, refinancing into a new mortgage could materially reduce your monthly payment.  Pro tip:  if you think you may benefit from a lower rate, call your existing mortgage company first.  They may be willing to lower your rate with a simple form, rather than having to provide your financial statements and go through underwriting.

Increased Property Values

Price inflation isn’t all bad. In recent years, locals have grown accustomed to above average appreciation in the value of residential real estate. Everyone is happy when the value of their home goes up, but as in many parts of life, the devil can be in the details.

In California, base increases in property tax reflect increases in value. Limited to 2% annually, the increases nonetheless add up over time.  In addition, there are numerous local assessments for bond measures and other public services. Berkeley’s property tax assessments are about one-third of our total property tax bills, and have increased much faster than state’s base rate. Some of that increase is due to new ballot measures that tax all property owners; some change based on the value of the home. All of them reflect the increasing costs of providing public services, and in this way, inflation makes its way into the pockets of homeowners as well.

A second concern for older homeowners is minimizing taxes. Most people want to age in place, and once a mortgage is paid off it feels affordable to stay in your house. Property tax costs continue to rise, though, and price increases can mean a huge taxable gain if you sell. In the odd logic of our tax code, you (or your heirs) won’t pay taxes on gains if you hold the property until your death. This encourages many people to stay in their house even when it may not be the best situation from a personal or medical perspective.

Inflation has been low for several decades; the full-scale monetary response to the pandemic could revive it. If you have questions about your ability to handle it, please be in touch

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This commentary on this website reflects the personal opinions, viewpoints, and analyses of the North Berkeley Wealth Management (“North Berkeley”) employees providing such comments, and should not be regarded as a description of advisory services provided by North Berkeley or performance returns of any North Berkeley client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data, or any recommendation that any particular security, portfolio of securities, transaction, or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. North Berkeley manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.

By |2020-10-20T14:38:01-07:00August 13th, 2020|