Bridging Wealth Gaps: Homeownership's Stand Against Inflation

When exploring the benefits of homeownership, it's more than just having a place to call your own. Among its many advantages, homeownership stands as a formidable safeguard against inflation and a strong vehicle for long-term wealth accumulation. This article will delve into the dynamics of appreciation and amortization, explaining why owning a home can be one of the most impactful financial decisions you can make.

Inflation, the overall upward price movement of goods and services in an economy, erodes the purchasing power of money. In simpler terms, as inflation rises, each dollar you have buys a smaller percentage of a good or service.  The same inflation that is driving rising mortgage rates is putting upward pressure on home prices and rents.

Over the past sixty years, homes have appreciated in value at an annual appreciation rate of 5.56% according to the Federal Reserve Economic Data.  As a homeowner, you want to benefit from the appreciation.  Inflation for the same period averaged 3.7% (Bureau of Labor Statistics) making homes an effective hedge against inflation.

Real estate, unlike many other assets, is a tangible, real asset. History has shown that over the long term, the value of real assets tends to rise at a rate that at least matches, if not outpaces, inflation. So, as the price of goods and services increases, so does the value of real estate, making homeownership a strategic move against inflationary pressures.

With a fixed-rate mortgage, your monthly principal and interest payment remains constant. As a result, while other costs may rise due to inflation, your primary housing cost (if you exclude taxes and maintenance) remains stable, shielding you from the full impact of inflation.

Home appreciation refers to the increase in the home's value over time. Given the finite nature of land and the ever-growing demand for housing, especially in thriving areas, real estate often appreciates. This appreciation can result in substantial equity gains for homeowners, creating a form of 'forced savings' and making it a powerful tool for wealth accumulation.

Amortization has been considered the silent wealth builder. Each time you make a mortgage payment, a portion of that payment goes toward the loan's interest, and the balance pays down the principal, thus retiring your debt incrementally. This process means you're gradually building equity in the home with each payment. Over time, a larger portion of your payment goes towards the principal, accelerating your equity buildup.

Combined, appreciation and amortization can lead to significant wealth growth for homeowners. As the home's value rises and the mortgage balance decreases, homeowners often find themselves sitting on a substantial asset, which can be leveraged in various ways, from securing loans to planning retirement.

While the emotional and social benefits of homeownership are often celebrated, the financial benefits are equally compelling. In a world of economic uncertainties and inflationary pressures, owning a home emerges not just as a source of stability but also as a strategy for long-term financial prosperity. By understanding and leveraging the twin forces of appreciation and amortization, homeowners can pave a path to meaningful wealth accumulation even during periods of relatively high mortgage rates.

For more information, download an information guide on Building a Case for Homeownership Today.

Baby Boomers' Wave to Downsize

As the first groups of baby boomers gracefully rides the wave of aging, they are setting new trends in the housing market, giving birth to what experts fondly refer to as the "Silver Tsunami." This phenomenon is not merely about a change in address; it's a lifestyle transformation tailored to meet the unique needs of the golden years.

With approximately 10,000 people reaching the age of 65 every day, the United States is witnessing an unprecedented demographic shift. By 2030, all baby boomers will have passed this milestone. Among these remarkable statistics, the AARP's estimate stands out: a staggering 74% of total U.S. homeownership belongs to individuals over 50, with more than half of this demographic opting for downsizing their home as a strategic move.

The Silver Tsunami is, in essence, a testament to the demographic strength of the baby boomer generation. Born between 1946 and 1964, this generation has played a pivotal role in shaping American society at every stage of life. Now, as they embrace their senior years, they are reshaping the real estate landscape. Downsizing has become a prevailing trend among this generation.

One of the fundamental aspects of this is the desire for aging Americans to remain in their homes, a concept known as "aging in place." However, this doesn't necessarily mean staying in the same large family home that has seen decades of memories. Instead, it often involves downsizing to a more manageable, efficient, and accessible living space.

The statistics are a testament to the appeal of downsizing among this generation. AARP estimates that a whopping 74% of homeownership in the United States is held by individuals over the age of 50. Additionally, more than 51% of people in this age group have already made the move to downsize.

The reasons behind this paradigm shift are as diverse as the individuals making it happen. For some, it's about financial prudence ... reducing the costs and maintenance associated with larger homes. For others, it's the desire for a simpler, more manageable lifestyle that allows them to focus on experiences rather than possessions. Accessibility and health concerns also play a significant role, with many opting for homes that are designed to accommodate mobility challenges.

Downsizing is having a profound impact on the housing market. It's not just about the scaling down trend; it's also about the types of homes that are in high demand. Single-story residences, condos, and communities with amenities tailored to an active older population are experiencing increased interest. Builders and real estate developers are adapting to these evolving preferences, creating more accessible, age-friendly housing options.

It is not merely a demographic shift; it's a testament to the baby boomer generation's determination to embrace their golden years on their terms. Downsizing is just one facet of this multifaceted trend, and it's changing the way we think about aging and housing. As the silver wave continues to ripple through the real estate market, it's essential for homeowners and industry professionals alike to be aware of these evolving preferences.

One way to find out about your options is to determine the value of your current home and its equity to facilitate the change in housing.  Contact us to provide this service at no obligation as well as to inform you what is available to meet your wants and needs.

Keep more profits from home sales

In recent years, home values have soared, presenting an opportunity for homeowners with substantial equity to consider a unique tax benefit.

Section 121 in the IRS code allows for homeowners who meet certain requirements to exclude up to $500,000 of capital gain on the sale of their principal residence.  Single or married taxpayers filing separately can exclude up to $250,000 of capital gain.  Taxpayers must meet the following requirements:

• They must have owned and used the home as a principal residence during at least 2 out of the last 5 years.
• They should not have excluded gain from another home during the two years before the current sale.
• The property should not have been acquired through a 1031 exchange during the past five years.

Capital gain is determined as selling price, less sales costs, less basis in the property which is the purchase price paid for the home plus capital improvements made during the tenure.  Capital gains more than the exclusion amounts are taxed at the capital gains rate which varies between 0% and 20% depending on the taxpayers adjusted gross income in the year of the sale. 

Some exceptions for divorce, death of a spouse, or military service may apply.  For more information, see IRS Publication 523 and download our Homeowners Tax Guide.  It is always advisable to seek the counsel of your tax professional for your particular situation.