Is real estate a good investment hedge against inflation? Experts in this Bloomberg article suggest that it is. Historically, in most housing markets, appreciation in real estate keeps up with inflation and in some major cities, like the Bay Area, exceeds it.
What struck me the most was the quote from Liz Young, head of investment strategy at SoFi. “If it’s not a lifestyle situation where you want more space or want to move to another geographical location, this might be a time to wait it out from buying. The risk is that the equity in the home doesn’t go up a ton in the next few years because home prices are so high. From an all-time-high price level, there’s downside risk to prices in the near term.”
While I agree there is downside risk to prices (i.e. devaluing your investment) in the near future, buying a home should be about projecting the lifestyle you want to live for the long term. This is how you can protect yourself against this downside risk. If you can envision what you want your life to be in the future and buy a house that matches that vision, you lessen the need to sell when life changes. Building wealth through real estate most often requires the ability to buy and hold. This is what achieves the greatest ROI — the appreciation obtained by holding on to real estate for the long term. If you do not have this clarity, it’s likely not a good time to buy.
Of course, you can’t plan for all scenarios that happen in life, since that’s just unrealistic. Divorces, death, illness, job loss are all aspects that we have to deal with in life but can also affect our housing needs. In some cases, there’s no level of planning that we can anticipate.
That said, the question you should be really asking yourself is, what does the home do for me? Does it fill the needs for what I want in the next 3–5 years? 10 years? Answering these questions requires serious introspection. Oftentimes, it requires a challenging conversation with your loved ones to envision the life you want for the future, and what type of home will fit in that lifestyle. This vision should inform everything in your search. This will help you decide where you want to live including what part of the bay, neighborhood, maybe even down to the street. When you can envision your lifestyle, you can start to envision the way in which you spend time in the home. This may help you decide what type of configuration and amount of space you’d need. Tough questions like having kids, how to budget for schools (private vs public), having other family members living with you (ADU or additional rooms) are questions to think through. These questions transcend just the number of bedrooms/bathrooms and size — they get to the “why” of buying a home. Because you chose a house for the future, you can limit the downside risk to prices
