There is, also, something to be said for housing as an inflation hedge. In the 1970s, when consumer prices rose by an average of more than 7% per year, median new home prices rose by more than 9% annually. In that decade, while long-term interest rates rose, inflicting losses on bondholders, stock prices only eked out a 2% annual gain, tarnishing the reputation of equities as an inflation hedge.
While we do not expect anything like a return to 1970’s style inflation, even somewhat higher inflation and interest rates will challenge both fixed income and equity markets and residential real estate could outperform both over the next few years.
Having said this, it is important in real estate (as in all investments) to be selective. All housing markets are not booming and apartments in major cities could suffer from a lack of demand for some time as many businesses adopt a permanent, albeit partial, work-from-home model in the wake of the pandemic. Rental properties could also see softer demand in the long run from a slowdown in population growth, which has been worsened by the pandemic. In addition, many other parts of commercial real estate will also bear some long-term scars from adjustments in consumer behavior wrought by the pandemic.
It is also important to note that, while the Federal Reserve’s actions in maintaining very low short-term rates and purchasing mortgage-backed securities has provided the nation with super-low mortgage rates, it is a very dubious policy either from the perspective of promoting economic equity or long-term growth. Very low mortgage rates are, of course, part of the reason home prices have risen so quickly. However, for younger and poorer households, scraping together the down payment is a more formidable hurdle than making the monthly mortgage payment and rising home prices are only making this problem worse. In addition, while a healthy home-building industry is obviously a good thing, it does little to enhance the productive capacity of the U.S. economy. An economy that invested more in research and development would presumably see stronger growth in the long run.
Still, for now, while both the pandemic recovery and the economic rebound remain on track, many parts of U.S. equity and fixed income markets appear expensive. This suggests the need for careful asset allocation and active management. And, with rising inflation, for younger investors in particular, this still looks like a good time to buy rather than rent a home.
David Kelly is chief global strategist at JPMorgan Funds.