How Houston Real Estate Can Be A Hedge Against Inflation

What the historical data tells us about using real estate to hedge against inflation in Houston

Study: Houston Real Estate And Inflation

Headlines these days are worrying. Inflation is at its highest in 40 years.

While the Fed has started raising interest rates, there’s no sign of inflation slowing down soon. [See Salary Needed To Buy A Home In Houston].

This raises an important question: how do you protect yourself against it? One option is to include assets in your portfolio to hedge against inflation.

During periods of high inflation, history has observed some winners and losers:

In this analysis, we’ve specifically focused on the benefits of owning Houston real estate.

Real estate can be an inflation hedge for three reasons:

We'll get into more detail on these three reasons later on.

There's no underestimating how inflation can be frightening and powerful over time. In addition, we’ve included information on why it’s likely Houston should continue to benefit from population growth and a strong economy. The #1 predictor of future real estate prices is job growth.

If you have any questions about how this may impact your family, please contact Paige Martin, founder of the Houston Properties Team (Houston’s #1 Boutique Real Estate Team).

If you're looking for a personal recommendation on your situation (buying or selling a home in Houston) and how it could impact your goals, please contact Paige Martin at Paige@HoustonProperties.com. Paige Martin is the #1 Individual Agent with Keller Williams in the State of Texas and team lead of The Houston Properties Team.

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Table of Contents

  1. What Is So Scary About Inflation? Here Are Examples.
  2. Inflation Explained
  3. What Is Driving This Inflation?
  4. How Long Do Inflations Like This Last?
  5. Benefit #1: Real Estate Holds Intrinsic Value
  6. Benefit #2: Fixed Rate Mortgages Paid Back in “Cheaper Dollars”
  7. Benefit #3 (For Investors): Inflation Impacts Rental Rates
  8. Why Houston Real Estate Should Outperform Inflation
  9. Impact Of The Russia-Ukraine Conflict
  10. Data Sources and Disclaimers
  11. Paige Martin and The Houston Properties Team

What Is So Scary About Inflation? Here Are Examples.

What Is So Scary About Inflation? Here Are Examples.

US inflation is at its highest since 1982. Most Gen X, Millennials, and Gen Zers have never had to “do the math” of the impacts of inflation.

U.S. Inflation Rate 1960-2022

From the early 1990s through 2020, US inflation averaged about 2% per year.

Most Gen X, Millennials, and Gen Zers have never had to “do the compounding math” of the impact of longer-term high inflation rates on assets and liabilities. It’s enormous.

The annual inflation rate for the United States is 7.9% for the 12 months ending in February 2022—the highest since January 1982.

The last time inflation initially went over 6% in 1973, it took 10 years (until 1983) to bring it back under 5%. From 1973 to 1982, US inflation averaged 8.75%.


Benefit #1: Examples For Real Estate Holding Intrinsic Value

If inflation averaged 7.9%, and real estate had 0% appreciation above inflation:

2022 2027 (5 years) 2032 (10 years)
Houston Home Price (Avg) $395,871 $578,976 $846,775
Houston Home Rental (Avg) $2,052 $3,001 $4,389


Benefit #2: Fixed Rate Mortgages Paid Back in “Cheaper Dollars”

Anyone with large, fixed-rate debts like mortgages benefits from higher inflation. These interest rates are locked for the life of the loan (meaning, they don’t change with inflation).

These mortgages are paid back with future “devalued dollars.”

If inflation averaged 7.9%:

Today Value In 15 Years In “Today’s Dollars” Value In 30 Years In “Today’s Dollars”
$350,000 $111,878 $35,762
$500,000 $159,826 $51,089

As the table above shows, the value of $350,000.00 will be reduced to $111,878 in today’s dollars in 15 years. That's assuming if the inflation rate averages at 7.9%.

This is an enormous benefit to debtors.

If mortgages are devalued against inflation, and home prices stay consistent with inflation home equity, values go up quite a lot.

When you evaluate the possibility of this happening in the US, remember:


Inflation Explained

Inflation Explained

Inflation has a “deflating effect” on debt. As home prices increase over time, it lowers the loan value of any mortgage debt. This acts as a buffer to price inflation (like a natural discount). So, in a sense, mortgages are paid in “cheaper dollars”.

Inflation is a loss of purchasing power over time—your dollar will not go as far tomorrow as it did today.

Let’s pretend that you have $5 in your pocket and you want to buy a loaf of bread. If you decide to buy it now, it will cost $2.50. You could buy two loaves of bread.

If you decide to save the $5 and use it to purchase bread later instead, there’s a chance that it won’t cost $2.50 anymore. It could cost $3. By then, you can only buy one loaf of bread. Your purchasing power has decreased because of inflation.

Consumer price inflation refers to basic consumer goods and services going up. Imagine paying $3 for a sandwich five years ago and $4 for the same sandwich this year. The price has inflated at 25%, with an average annual price inflation rate of 4.56%.

The table below lays out the consumer price index and the commodity producer price index since 1913, which is the founding year of the Federal Reserve.

2022 houston consumer and producer price index

Lyn Alden

Lyn Alden explains the table in layman's terms: "What that consumer price index chart shows, is that a basket of goods that would cost $100 in 1982, would cost $265 today, and would cost about $10 in 1913. The price of a basket of goods, in other words, has risen over 26x from 1913 to today in dollar terms."

2022 houston inflation history

Lyn Alden


What Is Driving This Inflation?

What Is Driving This Inflation?

You can potentially beat inflation if you’re buying in areas with historically good land value appreciation. You get more value out of your money as the equity on the house rises, but your fixed-rate mortgage payments remain the same.

Inflation can come about from various sources: supply chain issues, surging demand, production cost increases, and government policy. If an economy is running hot—one where many people have extra cash or credit and want to spend—it can lead to inflation.

One of the common causes of inflation worldwide is when the government creates money.

As you can see in the graph above, the US money supply (M2) was about $7 trillion going into the Great Recession.

After government policies brought about by the Great Recession and Covid-19 were implemented, the amount of money stock in the US is up to about $20 trillion.

That’s A LOT of new dollars.

The Fed alone has created about $4 trillion in new dollars since January 2020.

federal reserve assets

FederalReserve.gov

See our 2021 article explaining why US households were in the best shape ever thanks to government largess and why that had such a large impact on the real estate market.

Here’s a simple model to help you visualize how big a trillion dollars is:

The scale of a trillion dollars is almost incomprehensible.


How Long Do Inflations Like This Last?

How Long Do Inflations Like This Last?

Good properties (those with long-term value) will always be good protection against inflation because they will continue to appreciate in value. Historically, real estate keeps up with or exceeds the rate of inflation.

No one knows the answer to how long inflation will stay around. However, we can make predictions based on history.

us debt 100 years

FederalReserve.gov

Historical data reveals that the last time the US debt was as high on a % of GDP basis was after WWII.

us GDP percentage

At the time, the US held interest rates below inflation rates for about a decade to reduce the total debt burden.

We can draw some correlations and projections here, but there are plenty of variables at play unique to our situation today. How does an economy bounce back from a pandemic? What happens while and after the ongoing Russia-Ukraine conflict?


Benefit #1: Real Estate Holds Intrinsic Value

Benefit #1: Real Estate Holds Intrinsic Value

High-quality homes sell in nearly every market. Disadvantaged homes sell more slowly or at larger discounts. The Houston real estate market is hyper-local—contact the Houston Properties Team for tips on navigating it.

Good properties with long-term value will always be good protection against inflation because they will continue to appreciate. Real estate keeps up or exceeds the rate of inflation. In addition, long-term mortgages cost less because they’re paid back in “future, less valuable dollars.” Real estate does well mainly because leverage attached to it gets melted away from inflation.

There may be a limited supply of properties in dense, urban neighborhoods and a lack of available land to build new structures on. Real estate holds intrinsic value because it is scarce and always in demand.

Assume that a made-up country has $1 million of total currency and that there are 50 properties with no other goods or services available. Each house would be worth $20,000, assuming they are all identical.

Now, pretend that that country's central bank printed an additional $1 million in one day. That economy will now have a total of $2 million. Each home doubles in value at $40,000. Money printing is one of the factors that create inflation. It can also cause real estate prices to rise.

This is good news for current property owners, as demand for real estate does not generally decrease, even when inflation rises. In fact, property values might increase, given the rising cost of materials and labor to build a comparable structure. Building material prices have increased by over 19% during the past 12 months and 13% year-to-date, according to the National Association of Home Builders (NAHB).


Benefit #2: Fixed Rate Mortgages Paid Back in “Cheaper Dollars”

Benefit #2: Fixed Rate Mortgages Paid Back in “Cheaper Dollars”

Long-term mortgages “cost less” because they’re paid back in “future, less valuable dollars.” Real estate does well, mainly because leverage attached to it gets melted away from inflation.

Inflation has a “deflating effect” on debt. As home prices increase over time, it lowers the loan value of any mortgage debt.

This acts as a buffer to price inflation (like a natural discount). So, in a sense, mortgages are paid in “cheaper dollars”.

This is especially the case if you’re buying in areas with historically good land value appreciation as the equity on the house rises, but your fixed-rate mortgage payments remain the same.

The average homebuyer’s mortgage payments do not change over time. Inflation spikes mean that the value of money paid back in the future is worth less. When you have a fixed-rate loan, you pay the same amount each period throughout the life of the loan, regardless of inflation. As equity grows, fixed-rate payments stay the same.

Whenever we go through periods of inflation, the fixed-interest rate you took out when you bought your house costs you less than when you took out the loan since the dollar has lost some of its value. You’re essentially paying the lender back money that has a lower value.

There’s also a correlation between wage and revenue increase and periods of high inflation. If you’re making more money but your monthly payments for your financing stay the same, the payments take up a smaller percentage of your working capital.


Benefit #3 (For Investors): Inflation Impacts Rental Rates

Benefit #3 (For Investors): Inflation Impacts Rental Rates

Inflation benefits real estate investors who are earning money from rental properties. With higher home values come higher rental rates.

Inflation benefits real estate investors who are earning money from rental properties. With higher home values come higher rental rates.

Those who invest in rental properties can see increased revenue from higher leases. We constantly see investors inquiring about multi-family properties or rental-type houses with this in their minds. We expect 2022 to bring more of the same.

The other by-product of any type of economic imbalance like inflation is that people flock to cities with a lower cost of living. Houston has the third-lowest living costs among the most populous US metro areas. Living costs in The Bayou City are 4.4% below the nationwide average and 26% below the nation’s most populous metropolitan areas.

houston cost of living

GreaterHoustonPartnership

US Postal Service change-of-address records suggest that people have been fleeing cities with high costs of living for relatively more affordable ones over the past two years, which helps explain why the latter has already seen rents surge.


Why Houston Real Estate Should Outperform Inflation

Why Houston Real Estate Should Outperform Inflation

Houston has the third-lowest living costs among the most populous US metro areas. Texas has the 8th lowest tax rate in the US.

Houston Employment Outlook

Houston has recouped over 75% of the jobs lost during the early stages of the pandemic. Nine sectors have fully recovered their losses.

The latest economic forecasts predict that Houston will create nearly 80,000 jobs in 2022. We can expect the biggest gains in administrative support, government, healthcare and social assistance, professional, scientific, technical services, and restaurants and bars.

2022 houston jobs forecast


Houston Cost Of Living

Accounting for migration trends, Houston is still one of the top destinations for relocation. We can attribute this to the fact that Texas has no state income tax. Employment is also a main driver. Moreover, Houston is less dependent on the oil and gas industry.

Here are some advantages to Houston living, in numbers:

Houston also has the third-lowest living costs among the most populous US metro areas. Houston’s living costs are 4.4% below the nationwide average and 26% below the average of the nation’s most populous metropolitan areas.


Recent Real Estate Growth

2021 houston home sales full year

2021 is one of Houston’s best years in terms of real estate growth. On a year-to-date basis, Houston home sales are 13% ahead of 2020’s record pace. Total dollar volume is also up 28% to a record-breaking $40 billion.

To summarize, we see:

2022 houston sfh sales

2022 houston th sales


Inflation's Impact On Houston Real Estate

Neighborhood Median Home Price Home Price / Sq Ft 10-Yr Apprec. %
River Oaks Area $2,475,970 $549 57%
Piney Point $2,687,500 $432 40%
Hunters Creek $2,195,000 $413 49%
The Woodlands: Carlton Woods $1,857,450 $320 9%
Crestwood $2,200,000 $428 54%
Memorial Close In $1,742,500 $347 59%
Southside Place $3,100,000 $489 138%
Bunker Hill $2,310,000 $409 66%
Memorial Villages $1,764,000 $389 39%
Tanglewood Area $1,821,000 $364 40%
Hedwig Village $2,025,000 $394 42%
Memorial Park $1,835,000 $387 35%
West University/Southside Area $1,600,000 $442 61%
Southampton $1,472,500 $489 57%
Boulevard Oaks $1,350,000 $403 85%
Highland Village / Midlane $1,137,000 $340 48%
Rice / Museum District $855,000 $329 27%
The Woodlands: East Shore $865,000 $300 -4%
Braeswood Place $1,163,750 $312 66%
Bellaire Area $1,042,875 $276 24%
Briargrove $910,000 $364 31%
River Oaks Shopping Area $907,450 $287 44%

Impact Of The Russia-Ukraine Conflict

Impact Of The Russia-Ukraine Conflict

For Houston, the impact of the Russia-Ukraine conflict has mostly been about rising commodity prices.

About one-third of the Houston economy still is tied to oil and gas.

As you can see from the price of crude oil (WTI) in the graph above, the Russian-Ukraine conflict has had a big impact on oil and gas prices.

First, it increased prices by about 20-30%. Second, it dramatically increased the volatility of the price swings.

For oil and gas producers and their service companies, the increase in commodity prices boosts their cash flow and earnings.

We saw prices in this range last in 2014, before the oil and gas crash.

The additional profits from higher oil prices (and the correlated increase in energy company stock prices) helped create record Houston real estate prices in 2012, 2013, and 2014.

How About Houston Oil/Energy? Can We Expect A Boom?

The US has implemented a ban on the import of crude and refined products from Russia. In Houston, the embargo will directly affect two refineries that import crude from Russia: ExxonMobil and Valero. The indirect impact will be higher gas prices for all Houstonians.

We initially saw a hike in the oil price (as much as 25% per barrel). However, prices have since started slipping but remain well above where they stood before the conflict.

This won't likely lead to an immediate boom. Over the years, local oil companies have developed ways to be more efficient. Today, oil production doesn't need as many employees as it once did in the past.

The oil price surge will lead to profits in the short term, but the conflict and ongoing embargo will impact major oil producers for years.

houston imports: impact of russia and ukraine conflict

What helps paint a rosier picture though is the "better than projected" employment numbers for the first quarter of 2022. New data place the job recovery (post-pandemic) at 95.8% as of December 2021.


Data Sources and Disclaimers

Data Sources and Disclaimers

Houston real estate is hyper-local. For homebuying or selling advice, contact Paige Martin, the #1 Keller Williams Realtor in Houston and #1 Realtor in the state of Texas.

All Houston home value information was sourced from the HAR MLS database.


Paige Martin and The Houston Properties Team

Paige Martin and The Houston Properties Team

The Houston Properties Team has a well-defined structure based on the individual strengths of each member. Each member is a specialist in their role—which is why our homes sell faster and for more money than average.

Paige Martin, Broker Associate with Keller Williams Realty, and the Houston Properties Team are ranked amongst the top residential Realtors in the world.

They have been featured on TV and in dozens of publications including The Wall Street Journal, Fortune Magazine, Reuters, Fox News in the Morning, Money Magazine, Houston Business Journal, Houstonia, and Houston Chronicle.

Paige Martin was just ranked as the #5 agent in the world with Keller Williams, completing over $1 Billion in Houston residential real estate sales.

Her recent awards include:

– 2021 Best Real Estate Teams in America, RealTrends.com
– 2021: Top 100 Women Leaders in Real Estate of 2021
– 2021: America’s Top 100 Real Estate Agents
– 2021: Top Real Estate Team (Houston Properties Team), Houston Business Journal
– 2021: Best Houston Real Estate Team, Best of Reader’s Choice
– 2021: Top Real Estate Team (Houston Properties Team), Houston Business Journal
– 2021: #1 Real Estate Team, Keller Williams Memorial
– 2020: America’s Best Real Estate Teams, Best of America Trends
– 2020: Best Houston Real Estate Team, Best of Reader’s Choice
– 2020: Top Real Estate Team (Houston Properties Team), Houston Business Journal
– 2020: #6 Individual Agent, Keller Williams, Worldwide
– 2020: #1 Individual Agent, Keller Williams, Texas (Top Keller Williams Realtor)
– 2020: #1 Real Estate Team, Keller Williams Memorial
- 2019: Top Residential Realtors in Houston, Houston Business Journal
- 2019: America’s Best Real Estate Agents, RealTrends.com
- 2019: #5 Individual Agent, KW Worldwide
- 2019: #1 Individual Agent, KW Texas
- 2018: #5 Individual Agent, Keller Williams, Worldwide
- 2018: #1 Individual Agent, Keller Williams, Texas
- 2018: #1 Individual Agent, Keller Williams, Houston
- 2018: America’s Best Real Estate Agents, RealTrends.com
- 2018: Top 25 Residential Realtor in Houston, Houston Business Journal
- 2018: Texas’ Most Influential Realtors
- 2017: #1 Individual Agent, Keller Williams, Texas
- 2017: #1 Individual Agent, Keller Williams, Houston
- 2017: #10 Individual Agent, Keller Williams, Worldwide
- 2017: America’s Best Real Estate Agents, RealTrends.com
- 2017: Top 25 Residential Realtor in Houston, Houston Business Journal
- 2017: Texas’ Most Influential Realtors
- 2016: #1 Individual Agent, Keller Williams, Texas
- 2016: #1 Individual Agent, Keller Williams, Houston
- 2016: #20 Individual Agent, Keller Williams, Worldwide
- 2016: Texas’ Most Influential Realtors
- 2016: Top 25 Residential Realtor in Houston, HBJ
- 2016: Five Star Realtor, Featured in Texas Monthly
- 2016: America’s Best Real Estate Agents, RealTrends.com
- 2015: #9 Individual Agent, Keller Williams, United States
- 2015: #1 Individual Agent, Keller Williams, Texas
- 2015: #1 Individual Agent, Keller Williams, Houston
- 2015: America’s Best Real Estate Agents, RealTrends.com
- 2015: Top 25 Residential Realtor in Houston, HBJ
- 2015: Five Star Realtor, Texas Monthly Magazine
- 2014: America’s Best Real Estate Agents, RealTrends.com
- 2014: #1 Individual Agent, Keller Williams Memorial

...in addition to over 318 additional awards.

Paige also serves a variety of non-profits, civic and community boards. She was appointed by the mayor of Houston to be on the downtown TIRZ board.

Benefits Of Working With The Houston Properties Team

best realtors in Houston

Our team, composed of distinguished and competent Houston luxury realtors, has a well-defined structure based on the individual strengths of each member.

We find team approach as the most effective way to sell homes. We have dedicated people doing staging, marketing, social media, open houses, and showings. Each Houston Properties Team member is a specialist in their role—which is why our homes sell faster and for more money than average.

The benefits of working with a team include:

To meet all the award-winning members of the Houston Properties Team, please go here.


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