Economy: Try This Inflation Hedge at Home

By Lawrence Yun, chief economist of the NATIONAL ASSOCIATION OF REALTORS®. 

Over the long term, home prices tend to rise with commodity prices. And with prices for commodities like oil, copper, steel, and cement commanding sky-high prices and the Producer Price Index for construction up 39 percent over the last five years, sooner or later, the increasing costs of raw materials will push home prices higher.

So if you know consumers who are looking for a hedge against the rising cost of commodities and the inflation that usually accompanies it, you have a story to tell them about real estate. With the risk of rising construction costs on the horizon, "now is a good time to buy" becomes insightful investment advice, not just a marketing catchphrase.

Housing, after all, is the ultimate commodity. Every home is a basket of materials like steel, wood, and copper wiring that, when combined with the cost of land and labor, becomes a store of value for every commodity that’s gone into the home’s construction. It’s this tangible quality that ties the long-term price of a house to its cost of production and makes a home such a fundamentally different kind of investment than a stock or a bond.

The current oversupply may be keeping home prices low for now even as the cost of raw materials rises. But because home prices are grounded in hard costs, the long-term home price equilibrium will adjust at some point to reflect the price of production and the cost of land. Once builders are in a position to pass on higher commodity costs, buyers will begin to feel the price pressure.