As we navigate uncertain economic waters, many home shoppers are second guessing their plan to buy a home. And there’s no doubt that a home purchase is a big commitment, especially as experts continue to disagree whether the economy is headed for a recession. However, for those looking to safely invest their money over the medium- to long-term, there may be no better bet than real estate. As an asset, real estate tends to outperform other investments, permits families to grow generational wealth, and allows homeowners to invest their wealth in an asset that can act as an important hedge against inflation. Read on to learn more about why real estate is a safe bet in a recession.
Real Estate Is An Important Hedge Against Inflation
In an era of upward inflationary pressures and rising prices, many investments that seem to be offering reasonable rates of return actually lose real value over time, when inflation is taken into account. With inflation over 8% over the last year, any investment that is not providing at least a consistent 8% return year-over-year is actually losing money, when inflation is accounted for.
Real estate, then, can serve as an important “hedge” against inflation. Real estate tends to rise in value over time at a rate equal to or greater than the rate of inflation, because so much of residential real estate is capable of providing rental income. Rents tend to rise at or above the average rate of inflation, meaning that the value of real estate keeps pace as prices rise in the larger economy.
For homeowners, this can, in fact, be great news. As the purchasing power of each dollar declines, homeowners who have locked in their mortgage rates generally find that each dollar they owe on their mortgage is worth less over time, even as the value of their home appreciates in line with, if not faster than, the rate of inflation. For homeowners, this means that the cost of housing tends to decline as a percentage of household income over time.
Real Estate Outperforms Similar Assets In Recessionary Environments
Every investor has heard the aphorism “buy low, sell high.” However, in practice, timing the market is an almost impossible proposition. For most investors, it’s more important to invest in assets that have long-term growth potential than to try to time the stock, bond, or crypto markets.
According to an extensive 2020 study by Stanford University, real estate was among the assets that performed best in an inflationary market. Real estate is likewise a great investment in a recession. During a recession, rising interest rates and declining consumer confidence tend to slow the market somewhat, making it easier for real estate investors and homebuyers to find solid investments. Real estate — particularly real estate in growing markets — can be an attractive investment, given its long-term potential to outpace inflationary pressures.
Looking historically, real estate values have continued to increase despite recession, sometimes even increasing during the recession itself. In an era when risk is high, it tends to be a good idea to invest in the kinds of assets that aren’t likely to disappear or close up shop entirely.
Real Estate Almost Always Rises Over The Long-Term
In a recession, people tend to cut back on luxury items and nonessentials, but essential items such as real estate, utilities, and consumer staples tend to continue to increase in value. And as long as the population continues to grow, demand for housing is guaranteed to continue to grow. After all, everyone needs a place to live!
Experts generally agree that housing will continue to rise at a rate that exceeds the rate of inflation, although more slowly than last year’s torrid pace. In many ways, this is a good thing — an overheated real estate market is ripe for a “bubble” effect, in which speculators and anxious buyers drive up the price of an asset too quickly, leading to market corrections that can be devastating for individual investors. By contrast, a market that grows steadily but slowly is likely a great long-term place for investors to secure their money. Unlike a company
Short-term market ups and downs are to be expected, but over the five- to ten-year term, investors are more likely to grow their money in real estate — particularly residential real estate — than in other investments. There’s no risk that land will go out of business, after all.
Nothing Is A Sure Thing — Investors Should Always Think Local
Unlike other investments, real estate isn’t a fungible good. A condo in the heart of Chicago isn’t the same as one in suburban New Jersey or rural Missouri. Factors like weather, schools, access to jobs, and the general economy make real estate investment extremely location-dependent.
Working with a local expert can help you to understand which areas of your local market may be most likely to experience sustained growth over time. Not every neighborhood or property is equal, after all, and investing wisely now can ensure you’re best positioned to take advantage of long-term trends. Your local Baird & Warner agent knows everything about your market, and can help you understand the pros and cons of each potential property — as well as help you get the best available deal.
When Home Means More, You Need A Team With More To Offer
Nobody knows whether we’re actually headed toward a recession. But in uncertain economic times, it’s more important than ever to get the best possible advice as you consider how to invest your hard-earned money. Whether you’re buying or selling your Chicagoland home, understanding your market is critical. Buying or selling a home is a big deal, and our homes have never been more important. That’s why your local Baird & Warner agent is with you at every step of the way, from finding the perfect home to connecting you with local experts in mortgage and title. Whether it’s the beginning of a story or the end of a chapter, we’re here to help.