Housing as an Inflation Hedge: It's Not Magic, It's Leverage

Includes: DIA, QQQ, SPY
by: Tom Brown

In Barron’s, Gene Epstein seems not to understand ($) the main reason housing has been such a powerful hedge against inflation over the years: leverage. Among the investment alternatives available, housing is the only asset the typical individual can a) borrow against in size (like, four to one, on the biggest asset he’ll likely ever own) and b) be reasonably expected to hold for the long term. Combine those two facts, and even if home price appreciation materially lags CPI growth over a long period, the homeowner figures to earn a return on his housing investment that will run rings around the inflation rate. The math is pretty basic. If you doubt it, here it is.

One of the subtexts that’s emerged from the mortgage crackup is the notion that the housing market is at the end of an era, and will never again be a reliable builder of wealth for the average American. Hooey. The housing market never had any magical, wealth-building pixie dust. As Epstein himself points out, home price appreciation has been known to lag the inflation rate for years at a time--and has done so pretty recently, too. But if an individual can borrow 80% or more of the purchase price of an asset worth several hundred thousand dollars in the first place, and (unlike the habits he’s developed with stocks and commodities) hold it for five, ten, or 15 years, he’ll do very, very well even if the asset’s price only inches up every year in fits and starts. So, no, it’s not different this time. . . .

Tom Brown is head of BankStocks.com.