As CNBC.com put it earlier this month, the acknowledged wisdom remains: “real estate is known as a hedge against inflation.” That word “hedge”—at least as it applies to real estate—has a meaning that differs from the way it often appears in financial pages. There, “hedge funds” are the closely managed (sometimes frenetically managed) funds that attract wealthy individuals who pay costly management fees to produce (hopefully) positive results.
One surprising characteristic of hedge funds is that they are allowed to invest in more speculative areas—private equity, bankrupt companies, art, and currency are examples. Combined with what can be a very active management style, the result can result in a considerable level of risk. Given that the common meaning of “to hedge” is to offset or minimize risk, you’d think a “hedge fund” would be ultra-conservative. That meaning is a lot closer to the way “hedge” applies to real estate and what for homeowners is often their largest single investment.
With inflation surging at the fastest rate in nearly 40 years, price increases are conspicuous everywhere, from local eatery tabs to suddenly swollen utility bills. An exception is the rock-steady monthly mortgage payment due from homeowners who’ve locked in fixed-rate home loans. They are exceptions to government-sponsored Freddie Mac’s prediction for accelerating housing expenses. That’s why real estate is called a reliable hedge against inflation—a hedge not available to renters.