Hedges are a boundary or fence formed by bushes or shrubs. Though this landscaping choice is not for everyone, there is one thing we can all agree on: home ownership is a hedge against inflation. In monetary terms, a hedge is an investment to lessen the risk of unfavorable price movements in an asset or security. Purchasing a home is an excellent hedge against inflation, and here’s why:
BY THE NUMBERS
$4,000/month in rent will get you more house than $4,000/mo. in a mortgage, but that’s only looking in the present. That $4,000 rent would’ve been $2,000 for the same property 15 years ago. Every decade, rent as well as home values go up. However, when you lock into a 30-year fixed mortgage, your payment never changes. If it’s a $4,000/mo. mortgage today, it will be $4,000/mo. 5, 10, 15, and 20 years from now. If you live in that home for the length of the mortgage, when it ends you will only have to pay property taxes and insurance and/or HOA. Due to the time value of money, that $4,000 becomes less and less significant with each passing year. Meanwhile, renters are at the mercy of their landlord, who can raise the rent with every renewal of the lease; that’s assuming the landlord does renew the lease.
THE GIST
Death and taxes are a constant, but we should lump long-term inflation in there as well. Waiting to buy while paying tens of thousands a year in rent is financially unwise. Your first home purchase may not be that luxury single-family, but locking in to a fixed mortgage on a starter home beats the sting of inflation and acts as a stepping stone to the purchase of a larger home down the road.
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