New Jersey Real Estate Digest: Hedge Inflation, Gain Leverage

Monday, July 23, 2007

Hedge Inflation, Gain Leverage

When youu buy your home, it should be because you'll enjoy living in it. But it's nice to know that your home is also an excellent hedge against inflation, and your mortgage enables you to leverage you financial investment in it.
The decade at the end of the century was a time of relatively low inflation -- especially during its last few years But in the decade between 1980 and 1990 cumulative inflation increased 64%. A few years before that, when oil prices soared, inflaction leaped up 104%.
The value of well-kept homes, however, often rises well in excess of the inflation rate, over time. Even in aread with less aggressive housing markets, the value of homes has increased along with inflation. So over a number of years, if you home is well-maintained and in a good neighborhood, you can almost certainly count on selling it for more than you paid for it.
Another thing that makes buying a home a great investment: your mortgage enableyou to buy a home with a relatively small outlay of cash, so your money is leveraged, and you obtain appreciation on the entire value of the house, even though comparatively little of your own money is in it.
For example, if you bought a $150,000 homem with a $10,000 downpayment and home's value increased only three percent in the first year, you home's value would then be $154,500. You would have earned a paper profit of $4500 on your $10,000 cash investment -- a 45% return. If you paid cash for the home you would have received no leverage and made only a 3% return.

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